Introduction of SEBI

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.

Objective of SEBI

to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.

Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk

management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:

It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Byelaws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted in november 1998. However the Securities Contracts (Regulation) Act, 1956 (SCRA)

required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was then carried out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001.

Function of SEBI
set up by Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 Functions and Responsibilities SEBI has to be responsive to the needs of three groups,which constitute the market: the issuers of securities the investors the market intermediaries. SEBI has three functions rolled into one body quasi-legislative, quasijudicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court. SEBI has enjoyed success success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in seting up the regulations as required under law.

Advantage of SEBI
First came the blocking move, then a tactical retreat and now a pincer movement. In the battle of the regulators over who should regulate unitlinked insurance products (Ulips), the Securities and Exchange Board of India (Sebi) seems to have captured the strategic advantage over the Insurance Regulatory and Development Authority (Irda). After being asked to withdraw its 9 April ban on insurance companies from selling Ulips, Sebi first acquiesced; then, on 12 April, it modified its notice, requiring all new Ulip schemes launched after 9 April to be cleared by the markets regulator. Quickly, the other half of the pincer also moved; on 15 April, Sebi moved the Supreme Court and some high courts to protect against an ex parte decision against its latest order; that means Irda cannot tell insurance companies to ignore Sebis notice till the courts rule on it. In Singapore on 16 April, Sebi chairman C.B. Bhave said that he would like to move the appropriate court soon. Irda has thus far said nothing in response to Sebis latest actions, but insurance companies face a dilemma. Their most successful product they have sold about Rs 92,000 crore in Ulips can no longer be sold until the regulatory turf battle is settled. At the core of the dispute is the question of who should regulate hybrid products such as Ulips. In the case of exchange-traded currency and interest rate futures, a technical committee set up jointly by the Reserve Bank of India and Sebi recommended that exchange-traded instruments would be regulated by Sebi, while over-the-counter contracts (between banks, for example) would be overseen by the RBI. In this instance, Sebis view is that a Ulip is more a mutual fund-like product than insurance; since Sebi regulates collective investment schemes, Ulips should naturally fall under its purview. The bulk of the risk in a Ulip is market risk (the investible portion of the premium) and not event risk (the life cover). From Sebis perspective, that brings investor protection and other concerns into play. Ulips are hard sold, with no clear guidelines on expenses and commissions, and there are several concerns about mis-selling and inappropriate

incentives. Mutual funds, which had been accused of doing the same things earlier, are now subject to caps on management fees and other expenses; by comparison, the distribution reach of insurance companies through agents is much bigger and deeper in the hinterland. We (insurance companies) are not resisting regulation, but the roadmap has to be clear and it should be a real level playing field, says S.B. Mathur, secretary-general of the Life Insurance Council, an industry body. Insurance companies that have existed for over five years have to sell 18 per cent of all their policies in rural areas, and that implies high expenses. That does not mean insurance companies were mis-selling, he adds; if they were, renewal premiums would not have grown from Rs 8,825 crore in 2006-07 to over Rs 46,000 crore in 2008-09. However, if Sebi rules were to apply, it would extend the no-load regulation that applies to mutual funds, and curtail much of insurance companies distribution power. Mathur points out that Irda is already enforcing rules on limiting expenses. Even before the no-load rule came into effect for mutual funds, 40 per cent of all insurance policies were sold at a commission of less than 2 per cent, he says. The battle of the regulators brings to the fore the question of whether activity-based regulation is preferable to entity-based regulation. It is a problem that all markets face in the early stages of their evolution when the developmental and regulatory aspects of an industry are housed in the same agency. And it is important to address it now; soon, the Pension Fund Regulatory and Development Authority could face off against Sebi on the same issue. (This story was published in Businessworld Issue Dated 26-04-2010)

Responsibilities of SEBI
SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities the investors the market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasijudicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three-member tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court. SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as required under law. SEBI has also been instrumental in taking quick and effective steps in light of the global meltdown and the Satyam fiasco.[citation needed] It had[when?] increased the extent and quantity of disclosures to be made by Indian corporate promoters. More recently, in light of the global meltdown,it liberalised the takeover code to facilitate investments by removing regulatory strictures. In one such move, SEBI has increased the application limit for retail investors to Rs 2 lakh, from Rs 1 lakh at present. [3]

MUTUAL FUNDS
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).[1] The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. In the U.S., a fund registered with the Securities and Exchange

Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually. Most funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors. Since 1940 in the U.S., with the passage of the Investment Company Act of 1940 (the '40 Act) and the Investment Advisers Act of 1940, there have been three basic types of registered investment companies: open-end funds (or mutual funds), unit investment trusts (UITs); and closed-end funds. Other types of funds that have gained in popularity are exchange traded funds (ETFs) and hedge funds, discussed below. Similar types of funds also operate in Canada, however, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, undertakings for collective investments in transferable securities (UCITS, pronounced "YOU-sits") and SICAVs (pronounced "SEE-cavs").

Types of mutual funds

The term mutual fund is the common name for what is classified as an openend investment company by the SEC. Being open-ended means that, at the end of every day, the fund continually issues new shares to investors buying into the fund and must stand ready to buy back shares from investors redeeming their shares at the then current net asset value per share. Mutual funds must be structured as corporations or trusts, such as business trusts, and any corporation or trust will be classified by the SEC as an investment company if it issues securities and primarily invests in nongovernment securities. An investment company will be classified by the SEC as an open-end investment company if they do not issue undivided interests in specified securities (the defining characteristic of unit investment trusts or UITs) and if they issue redeemable securities. Registered

investment companies that are not UITs or open-end investment companies are closed-end funds. Closed-end funds are like open end except they are more like a company which sells its shares a single time to the public under an initial public offering or "IPO". Subsequently, the fund's shares trade with buyers and sellers of shares in the secondary market at a market-determined price (which is likely not equal to net asset value) such as on the New York or American Stock Exchange. Except for some special transactions, the fund cannot continue to grow in size by attracting more investor capital like an open-end fund may.

Exchange-traded funds
A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. ETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at prices generally approximating the ETF's net asset value. Most ETFs are index funds and track stock market indexes. Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Most investors buy and sell shares through brokers in market transactions. Because the institutional investors normally purchase and redeem in in kind transactions, ETFs are more efficient than traditional mutual funds (which are continuously issuing and redeeming securities and, to effect such transactions, continually buying and selling securities and maintaining liquidity positions) and therefore tend to have lower expenses. Exchange-traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market, but who, for regulatory reasons, are limited in their ability to participate in traditional U.S. mutual funds.

Equity funds
Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold 50 percent of all amounts

invested in mutual funds in the United States.[7] Often equity funds focus investments on particular strategies and certain types of issuers.

Market Capitalization
Fund managers and other investment professionals have varying definitions of mid-cap, and large-cap ranges. The following ranges are used by Russell Indexes:[8]

Russell Microcap Index micro-cap ($54.8 539.5 million) Russell 2000 Index small-cap ($182.6 million 1.8 billion) Russell Midcap Index mid-cap ($1.8 13.7 billion) Russell 1000 Index large-cap ($1.8 386.9 billion)

Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies that have the potential for large capital gains, and value funds, which concentrate on stocks that are undervalued. Value stocks have historically produced higher returns; however, financial theory states this is compensation for their greater risk. Growth funds tend not to pay regular dividends. Income funds tend to be more conservative investments, with a focus on stocks that pay dividends. A balanced fund may use a combination of strategies, typically including some level of investment in bonds, to stay more conservative when it comes to risk, yet aim for some growth.[citation needed] Index funds versus active management Main articles: Index fund and active management An index fund maintains investments in companies that are part of major stock (or bond) indexes, such as the S&P 500, while an actively managed fund attempts to outperform a relevant index through superior stock-picking techniques. The assets of an index fund are managed to closely approximate the performance of a particular published index. Since the composition of an index changes infrequently, an index fund manager makes fewer trades, on average, than does an active fund manager. For this reason, index funds generally have lower trading expenses than actively managed funds, and typically incur fewer short-term capital gains which must be passed on to shareholders. Additionally, index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques, research,

etc.) and deciding when to buy, hold or sell individual holdings. Instead, a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index. Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broadbased portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992.[9] An analysis of the equity funds returns of the 15 biggest asset management companies worldwide from 2004 to 2009 showed that about 80% of the funds have returned below their respective benchmarks.[citation needed] Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grinblatt and Sheridan Titman, 1989)..
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Bond funds
Bond funds account for 18% of mutual fund assets.[7] Types of bond funds include term funds, which have a fixed set of time (short-, medium-, or longterm) before they mature. Municipal bond funds generally have lower returns, but have tax advantages and lower risk. High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential for high yield, these bonds also come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States.[11] Money market funds generally entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs), open-end money fund shares are generally liquid and redeemable at "any time" (that is, normal business hours during which redemption requests are taken - generally not after 4 PM ET). Money funds in the US are required to advise investors that a money fund is not a bank deposit, not insured and may lose value. Most money fund strive to maintain an NAV of $1.00 per share though that is not guaranteed; if a fund "breaks the buck", its shares could be redeemed for less than $1.00 per share. While this is rare, it has happened in the U.S., due in part to the mortgage crisis affecting related securities.

Funds of funds
Funds of funds (FoF) are mutual funds which invest in other mutual funds (i.e., they are funds composed of other funds). The funds at the underlying level are often funds which an investor can invest in individually, though they may be 'institutional' class shares that may not be within reach of an individual shareholder). A fund of funds will typically charge a much lower management fee than that of a fund investing in direct securities because it is considered a fee charged for asset allocation services which is presumably less demanding than active direct securities research and management. The fees charged at the underlying fund level are a real cost or drag on performance but do not pass through the FoF's income statement (statement of operations), but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. FoF's will often have a higher overall/combined expense ratio than that of a regular fund. The FoF should be evaluated on the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor. Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in unaffilated funds (those managed by other advisors) or both. The cost associated with investing in an unaffiliated underlying fund may be higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Recently, FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis). The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for investors who are unable to or unwilling to determine their own asset allocation model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard, and Fidelity have also entered this market to provide investors with these options and take the "guess work" out of selecting funds. The allocation mixes usually vary by the time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target retirement date, the more aggressive the asset mix.

Hedge funds
Hedge funds in the United States are pooled investment funds with loose, if any, SEC regulation, unlike mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act of 1940.[12] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a performance fee of 20% of the hedge fund's profit. There may be a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund for individual investors. Mutual funds vs. other investments Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options, although there is dispute over whether professional fund managers can, on average, outperform simple index funds that mimic public indexes. Yet, the Wall Street Journal reported that separately managed accounts (SMA or SMAs) performed better than mutual funds in 22 of 25 categories from 2006 to 2008. This included beating mutual funds performance in 2008, a tough year in which the global stock market lost US$21 trillion in value. In the story, Morningstar, Inc said SMAs outperformed mutual funds in 25 of 36 stock and bond market categories. Whether actively managed or passively indexed, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.
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