The Securities and Exchange Board of India, commonly known as SEBI, is the regulatory body governing the commodities and securities markets in India. Just like RBI oversees the functioning of banks, SEBI governs the players of the capital markets. In this blog, we take a hard look at SEBI – what it does, its importance and the mechanisms it has in place to promote a healthy market.

The article covers:

SEBI meaning – what is SEBI?

Short for Securities and Exchange Board of India, SEBI was established as an autonomous regulator on 12th Apr 1992 with two main purposes – regulating the capital markets and protecting the interests of investors. Today, SEBI has emerged as a multifaceted entity that not only performs these two duties but also strives to promote the capital markets as a safe place by actively engaging in the creation of regulations and guidelines for the participants in the capital markets.

Why was SEBI formed?

The government felt a need to incorporate an authoritative body to ensure a fair market for investors and oversee the functioning of capital markets. SEBI was, thus, born and vested with powers to meet the needs for market regulation supervising the intermediaries, as well as protecting investors. 

Today, the SEBI meaning has evolved. From being just a regulator, SEBI has come to be a catalyst for the development of the market and the economy as a whole.  

Structure of SEBI

SEBI has been established as a corporate entity that has a board of members with a designated chairman heading it. There are a total of 9 representatives on the SEBI board of members. They are as follows:

  • A chairman who is appointed by the government
  • 2 members who are officers belonging to the Ministry of Finance
  • 1 member who is appointed by the Reserve Bank of India (RBI), and
  • 5 members as chosen by the government

There are about 20 departments in SEBI, and each department is headed by a head of the department (HoD). Some of the departments are:

  • Corporate finance
  • Hybrid and debt securities
  • Human resources
  • Commodity derivatives market
  • Investment management
  • Legal affairs

Objectives of SEBI

The SEBI is held responsible for three groups of market participants:

  1. The issuer: Create a level playing field for the companies where they can efficiently and fairly raise funds.
  2. The investor: Protect and supply accurate and timely information, and ensure companies make appropriate declarations to the investors so that investors may make informed choices.
  3. The market intermediaries: Provide a professional and competitive market to brokers, dealers, and other intermediaries.

Over the years, SEBI has expanded its reach to cover various aspects of the investing process itself that impact the capital markets. The primary objectives of SEBI include the following:

  1. Investor protection: SEBI aims to protect investors’ interests and rights. It provides guidance and conducts awareness programs so that investors may make informed decisions.
  2. Regulating capital markets and prevention of unethical practices: SEBI continuously issues rules and guidelines and keeps a close watch on market players to ensure that they do not engage in unethical practices.
  3. Development of the market: SEBI constantly strives to develop and promote market participation by undertaking research and development and providing training to the participants.

Functions of SEBI

The functions of SEBI can be categorized under each of its objectives. Let’s have a look:

Role of SEBI in protecting investors

  • Creation of educational and awareness programs for investors
  • Prohibition of insider trading and other fraudulent trading practices
  • Checking price rigging of stocks and unnatural price movements in the market
  • Keeping a check on price manipulation by unethical traders and investors 
  • Promoting fair trade practices to give equal opportunities to all investors

Role of SEBI in regulating the capital market

  • Regulation of the activities of custodians, trusts, Depository Participants, Registrar and Transfer Agents, credit rating agencies, and others operating in the market
  • Creation of trading guidelines and code of conduct for companies and intermediaries participating in the capital market
  • Conducting audits of companies and the stock exchange
  • Governing and monitoring mergers, acquisitions, and takeovers
  • Registrering intermediaries and companies that wish to participate in the capital market
  • Registration and regulations of credit rating agencies
  • Registration and regulation of mutual fund companies and schemes

Role of SEBI in the development of the market

  • Development of the securities market
  • Providing a platform for distributors, middlemen, investment managers, and other professionals to register themselves and work in the market
  • Engaging in research and development activities to keep the capital market efficient
  • Encouraging self-regulation
  • Training and development of market intermediaries 

Powers of SEBI

Being the apex regulatory body of the capital market, SEBI is vested with considerable powers. The powers of SEBI are as follows:

  • Quasi-Executive: SEBI is vested with the power of checking the financial accounts and statements of companies. This is to ensure that the companies are following the rules and that there are no violations. SEBI also has the power to implement the rules and regulations that it formulates and take the necessary legal action against violators. 
  • Quasi-Judicial: The Quasi-Judicial power allows SEBI to deliver judgments if it uncovers fraudulent and unethical practices.
  • Quasi-Legislative: This power gives SEBI the right to issue and implement rules and regulations for fair trading practices and investors’ protection.

Though SEBI has these powers, market participants can challenge it in a court of law – it is answerable to the Supreme Court of India as well as the Securities Appellate Tribunal.

Mutual fund regulations by SEBI

SEBI also governs the mutual fund industry and has prescribed various regulations with regards to the same. Here is a look at some of the most common ones:

  • A group company, sponsor or associate of the mutual fund scheme, including the Asset Management Company (AMC) itself, is not allowed to hold more than 10% stake and voting rights in the AMC or in any mutual fund scheme
  • An AMC cannot be appointed or have any representation on the Board of Directors of any mutual fund company
  • A shareholder cannot hold more than a 10% stake in the AMC, either directly or indirectly
  • In the case of a sectoral or thematic index, a single stock cannot have more than 35% weight in it. In the case of other types of indices, the maximum weight that a stock can have is limited to 25%
  • The top three participants of the index should not have more than 65% weight in the index cumulatively
  • One independent constituent of the index should have a minimum of 80% trading frequency
  • AMCs are required to ensure that they comply with SEBI guidelines. This compliance should be checked quarterly. They should also publish the constituents of their indices on their website for public use
  • Before a new fund is launched, the company should submit the compliance status of the fund to SEBI
  • Liquid mutual funds should hold at least 20% of the portfolio in liquid assets like cash, T-bills, Government Securities and the like
  • Debt funds can invest a maximum of 20% of their portfolio in one sector. For investing in Housing Finance Companies, the limit is 10% and for securitized debt that is based on retail and affordable housing portfolios, the limit is 5%
  • For evaluation of debt and money market instruments, amortization and mark-to-market methodology can be used
  • Liquid fund investors would be charged an exit load if they exit the scheme within 7 days
  • Mutual funds are allowed to invest only in listed non-convertible debentures, commercial papers and equity shares
  • Liquid and overnight mutual funds cannot invest in debt, short-term deposits or money market instruments
  • If you are investing in debt securities that have credit enhancements, you should have a minimum security cover of 4 times. A limit of 10%, in debt and money market instruments, is recommended for such schemes

SEBI, therefore, is an important authority, enjoys a lot of powers, and discharges various duties. It also keeps on making amendments to existing laws to adapt them to the changing dynamics of the market. So, know about SEBI, its functions, and powers so that you can invest with the knowledge that SEBI would protect your interests.

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