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what is SEBI?
SEBI, which is an abbreviation for Securities and Exchange Board of India, whose functions are similar to those of the SEC or the Securities Exchange Commission in the United States. In other words, SEBI regulates the functioning of financial markets in India, as well as sets ethical standards for the protection of investors and the functioning of financial markets in India. This is the reason why SEBI is also called the watchdog of Indian markets. There have been many instances where SEBI has acted in the interest of the investor by preventing insider trading in various companies in the equity markets. Similarly there have been instances when SEBI has acted in the interest of the small investor in the mutual fund industry.
What is mutual fund industry?
The origin of this industry in India can be traced back to the year 1963 with the introduction of the concept of a mutual fund by UTI. Though growth was slow at that time, it picked up pace after 1987, when non-UTI players entered the industry. Not everyone can time the equity market as some investors do. For the benefit of those unfortunate investors who cannot, the mutual fund industry exists. It is an instrument that invests in equity on behalf of the individual investor in order to maximize his/her returns. A mutual fund is a base of equity investment which is done on the basis of thorough research and development. This research and development is done by the asset management companies of mutual funds. They are also called AMCs. The product portfolio of these funds consists of investment in equity which will give good results over time. Mutual funds are rated by various rating agencies. This rating is done by agencies like CRISIL etc. These funds seek to reduce the risks the individual investor is exposed to. At times they may even focus on a particular area.
role of sebi
SEBI was first established in the year 1988. At that time it functioned as a non-statutory body for regulation of securities market. In the year 1992 it became an autonomous body with independent powers. SEBI was given more powers by passing an ordinance. It now independently regulates the securities markets with its independent powers.
The main objectives of SEBI are as follows:
- develops securities markets
- Promotes investor interest.
- Makes rules and regulations for securities markets.
As far as the functions of SEBI are concerned, it performs the following functions:
- Regulates the securities markets.
- securities trading checks
- Investigates malpractices in the securities markets.
- Enhances the knowledge of investors regarding the markets by providing education from time to time.
- Regulates stock-brokers and sub-brokers
- Promotes research and investigation.
SEBI introduced SEBI (Mutual Fund Regulation) 1993 to exercise direct control over mutual funds for both private and public sector.
2 cases
Case Study 1:
On 1 August 2009, almost a year ago, SEBI, the stock market regulator, took action to prevent mutual funds from charging entry loads. Typically these funds charge an entry load at the rate of 2.25% of the NAV of the mutual fund in question. This money was then used to pay agent commissions. In the new regime, SEBI wanted the investor and the agent to negotiate and fix the rate of commission, which would be paid by the investor to the agent through a separate cheque.
While this made it cheaper for retail investors to buy mutual funds, commissions for its agents declined, effectively leaving few people to sell. Now even a year after the passage of this rule, pure redemption is happening in this industry. Assets under management for equity funds, which are said to have the highest retail participation among various sectors, have seen net redemptions in 8 out of 11 months since SEBI imposed restrictions on entry loads.
In case of equity mutual funds, there have been net withdrawals since August 2009. An industry person also said that the need for mutual funds cannot be compared to the need for toothpaste and toilet soap. The latter were necessities, while the former were luxuries for those who had extra income after meeting their basic needs. As ULIPs started paying higher commission to their agents on their sales, agents left mutual funds and switched to ULIPs. It is said that between July 2009 and March 2010, ULIPs managed to raise a total of Rs 108.83 crore. This incident clearly shows the power of commissions in a country which is just coming out of the clutches of financial illiteracy.
There was an attempt to bring parity between ULIPs and mutual funds when SEBI mandated that all ULIPs must register themselves with SEBI, but an ordinance that placed the control definitively in the hands of the insurance regulator IRDA, and Away from the market regulator showed a ray of hope for the mutual fund industry. Fund houses grappling with the changes are said to be finding it difficult to woo retail customers. The head of a foreign mutual fund house said the change was brought in very quickly and the new business model will take time to percolate in the market. Thus the engagement with the end consumer is reduced as everyone is internally focused.
Case Study 2:
Restrictions on 197 FIIs and 342 sub-accounts from fresh purchases in the markets. SEBI said that if these organizations are ready to make these disclosures to other regulators then why not to SEBI? FIIs were given a time limit to meet these disclosure norms and violators were not allowed to take fresh positions. (This has had no impact on their current positions). More controversial is SEBI’s proposed code of conduct. It proposes to identify key people in merchant banks, mutual fund companies and brokerages who can be held responsible for frauds and violations of norms. This is apart from setting up a common database of defaulters which will hold information about past and ongoing frauds, investigations and defaults by market players etc. Market analyst and CEO Value Research, isn’t sure how this will work but according to him it boils down to establishing a legal framework and proof of wrongdoing.
SEBI is doing this mainly to discipline the market so that individual or retail investors do not hesitate to put their hard earned money into mutual funds and securities markets. It is said that India was spared the after effects of the global recession because of the actions of this regulator, which has been acting as a watchdog protecting the interests of investors in a volatile market full of AMCs and mutual funds.
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