The Watchdog of the Indian Markets – SEBI

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What is the SEBI?

SEBI, which is a abbreviation for Securities and Exchange Board of India, which has functions similar to the SEC or Securities Exchange Commission in the USA. In other words the SEBI regulates the working of the financial markets in India, vis-à-vis investor protection and laying down of ethical standards for the working of the financial markets in India. This is why SEBI is also called as the watchdog of the Indian Markets. There have been many instances where SEBI has acted in the interests of the investor by preventing insider trading in various companies in the equity markets. Similarly there have also been cases when SEBI has acted in the interest of the small investor in the Mutual Fund Industry.

What is the mutual fund industry?

The origin of this industry in India is with the introduction of the concept of a mutual fund by UTI in the year 1963. Although the growth was slow at that time, it accelerated post 1987, when the non-UTI players entered the industry. Not everyone can time the equity markets as well as some investors do. For the benefit of those unfortunate investors who cannot, there is the mutual fund industry. This is an instrument which invests in equities on behalf of the individual investor so as to maximise his gains. A mutual fund is a basked of equity investments which are done based on exhaustive research and development. This research and development is carried out by the asset management companies of the mutual funds. They are also called as AMCs. The product portfolio of these funds contains investments in equities which would yield good results over a period of time. The mutual funds are rated by various rating agencies. This rating is carried out by the agencies like CRISIL, etc. These funds tend to hedge the risks for the individual investor so as to minimise his losses. At times they may also concentrate on one particular sector.

Role of SEBI

The SEBI was first established in the year 1988. At that time it acted as a non-statutory body for the regulation of the securities market. In the year 1992, it became an autonomous body with independent powers. Through the passing of an ordinance, more powers were given to the SEBI. Now it independently regulates the securities markets with its independent powers.

The main objectives of the SEBI are as under:

  • Develops the securities markets
  • Promotes investor interest.
  • Makes rules and regulations for the securities markets.

As far as the functions of SEBI are concerned, it performs the following functions:

  1. Regulates the securities markets.
  2. Checks trading of securities
  3. Checks the malpractices occurring in the securities markets.
  4. Enhances investor knowledge, with regard to the markets by providing education from time to time.
  5. Regulates the stock-brokers and sub-brokers
  6. Promotes research and investigation.

SEBIs introduction of the SEBI (Mutual Fund Regulation) 1993 was established to have direct control over the mutual funds for both the private and the public sector.



On August 1st, 2009, nearly one year back, the SEBI, the stock market regulator acted to prohibit mutual funds from levying entry loads. Typically these funds used to charge entry loads at the rate of 2.25% of the of the NAV of the mutual fund in question. This money was then used to pay the agent commissions. In the new regime, SEBI wanted the investor and the agent to negotiate and arrive at a rate of commission, which would then be paid by the investor to the agent by way of a separate cheque.

Although this made it cheaper for retail investors to buy mutual funds, the fall in commission for its agents, effectively left few people to sell it to them. Now, even after one year of this rule being passed, there are net redemptions occurring in this industry. Assets under management for equity funds, which are said to have the most amount of retail participation among the various segments, have seen net redemptions in 8 out of 11 months since the ban on entry loads was introduced by the SEBI.

There have been net outflows since August 2009 in case of equity mutual funds. One industry person also said that the need for mutual funds could not be compared with the need for toothpaste and toilet soaps. The latter happened to be necessities, whereas the former were luxuries for people who had excess income after fulfilling their basic needs. As ULIPs began offering more commissions to its agents on their sales, agents dropped mutual funds and flocked to ULIPs. It is said that between July 2009 and March 2010, ULIPs managed to raise Rs108.83 crore in total. This incident clearly illustrates the power of commissions in a country which is just coming out of the throes of financial illiteracy.

There was an attempt to bring in parity between ULIPs and mutual funds, when SEBI said that all ULIPs should register themselves with the SEBI, but an ordinance that placed the controls definitively in the hands of the Insurance Regulator IRDA, and away from the hands of the market regulator put paid to a glimmer of hope for the mutual fund industry. Fund houses grappling with changes are said to be finding it difficult to wean the retail customer The head of a foreign mutual fund house said that the change was brought about too fast and the new business model will take time to percolate in the market. Thus the engagement with the end consumer has gone down as everyone is focussed internally.


The ban on 197 FIIs and 342 sub-accounts from fresh buys, in the markets. SEBI said that if these organizations are willing to make these disclosures for other regulators, when why not for SEBI? The FIIs were given a deadline to meet these disclosure norms and those who flouted the rules were not allowed to take fresh positions. (There’s no impact of this on their current positions). More controversial is the proposed code of conduct of SEBI. This proposes to identify key people in merchant banks, mutual fund companies and brokerages, who can be held responsible for frauds and violation of norms. This is in addition to setting up a common database of defaulters that will carry information on past and ongoing frauds, investigations and defaults by market players, etc. Market analyst and CEO Value Research, is not sure how this will work but according to him it boils down to the legal framework and establishing the evidence of fault.

SEBI is doing this primarily to discipline the market so that the individual or retail investor may not hesitate to give his hard earned money to the mutual funds and securities markets. It is said that India was saved from the after effects of the global meltdown only due to the actions of this regulator which is acting as a watchdog protecting investor interest in a volatile market full of wannabe AMCs and mutual funds.

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