A comprehensive guide to SEBI (Securities and Exchange Board of India): Roles, functions, and regulations

What Is SEBI: Structure, Guidelines, Powers & Functions

SEBI, short for Securities and Exchange Board of India, is the securities market regulator in India. SEBI is a statutory body of the Indian government established in 1992 to promote transparency in the Indian equity market. 

The primary role of SEBI is to regulate the functioning of Indian capital or equity markets to safeguard investor interest and create a safe investment environment by enacting rules and regulations. SEBI also ensures that capital markets function properly and efficiently, creating an investor-friendly environment. 

Understanding SEBI

The Securities and Exchange Board of India (SEBI) is the most important regulator of securities markets in India. It serves as the watchdog for Indian securities markets and its participants. To better understand the functioning of SEBI, it would be helpful to draw parallels between SEBI and US SEC as SEBI is the US market regulator’s Indian counterpart. 

Essentially, all things equity or capital markets will be routed through SEBI. Its stated objective is “to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.”

SEBI was established on 12 April, 1992 following the passage of the Securities and Exchange Board of India Act by the Parliament. The SEBI headquarters is located at the Bandra-Kurla Complex in Mumbai. It also has regional offices in New Delhi, Kolkata, Chennai, and Ahmedabad, and more than a dozen local offices in cities including Bangalore, Jaipur, Guwahati, Patna, Kochi, and Chandigarh.

Functions of SEBI

The broad function of SEBI is to regulate the securities market in India. We have highlighted the key functions performed by the regulator.

Regulatory Functions

  • Regulate the business in stock exchanges and any other securities markets
  • Register and regulate the working of the depositories, participants, custodians of  securities,  foreign  institutional  investors,  credit  rating agencies, and other intermediaries
  • Register and regulate the working of venture capital funds, mutual funds, and other schemes
  • Regulating substantial acquisition of shares and takeover of companies
  • Raise requests for information, inspection, conducting inquiries and audits 

Protective Functions

  • Prohibit securities markets-related fraud and unfair trade practices
  • Prohibit insider trading in securities
  • Issue directions to protect the interests of investors, intermediaries, fair trade, and balance of trade. 

Development Functions

  • Promote investor education and training of intermediaries of securities markets
  • Promoting and regulating self-regulatory organizations

You can visit the SEBI’s official website to learn more about the SEBI’s functions and its powers

SEBI’s powers and structure

SEBI is responsible for governing the capital markets in India. The impact of SEBI decisions is felt by investors, SEBI-registered companies, and the economy at large. At the same time, the governing structure of SEBI is strong and formal to ensure that individual investors or entities cannot influence the functioning of SEBI. 

SEBI’s powers

SEBI is an autonomous organization. It wields some power over the functioning of the Indian capital markets:

  • Quasi-judicial: To deliver judgments on fraudulent and unethical practices.
  • Quasi-executive: To enforce regulations and judgments. Additionally, take legal action against the violators. Inspect the books of accounts and other documents in case of any violation of regulations.
  • Quasi-legislative: To frame rules and regulations such as insider trading regulations, listing obligations, and disclosure requirements to protect the interests of investors. 

SEBI’s structure 

SEBI India follows an intricate structure akin to corporates. SEBI has a board of directors, senior management, and department heads for its 20 departments. 

The hierarchical structure comprises 9 designated officers

  • The Chairman – Nominated by the Union government.
  • Two members from the Union Finance Ministry.
  • One member from the Reserve Bank of India
  • Five members nominated by the Union government.

SEBI’s guidelines on cloud framework

One of the core functions of SEBI is to guide registered companies to adopt best practices in all areas of management. In line with this, the regulator in March 2023 formulated a framework with nine principles for the adoption of cloud services by regulated entities (REs) titled ‘The Framework for Adoption of Cloud Services by SEBI-regulated entities (REs)’

The main objective of SEBI’s cloud framework is the de-risking of cloud adoption by creating the basis for necessary access and data controls. Since cloud computing is an emerging field, creating a framework to mitigate technological and compliance risks is the first step in boosting widespread cloud adoption.

SEBI’s cloud framework guidelines are formulated as nine high-level principles

  • Principle 1: Governance, Risk and Compliance Sub-Framework
  • Principle 2: Selection of Cloud Service Providers
  • Principle 3: Data Ownership and Data Localization
  • Principle 4: Responsibility of the Regulated Entity
  • Principle 5: Due Diligence by the Regulated Entity
  • Principle 6: Security Controls
  • Principle 7: Contractual and Regulatory Obligations
  • Principle 8: BCP, Disaster Recovery & Cyber Resilience
  • Principle 9: Vendor Lock-in and Concentration Risk Management

You can refer to these guidelines in detail on SEBI’s official website

REs, including stockbrokers, mutual fund companies, stock exchanges, asset management companies, and KRAs (KYC Registration Agency) are required to comply with these principles with immediate effect.
REs currently using a cloud framework must ensure that they’re compliant with these rules within 12 months of the release of the circular.

SEBI’s Potential Risk Class Matrix for debt mutual funds

SEBI leaves no stone unturned when it comes to safeguarding investor interests. Mutual fund investments also come under SEBI’s purview. To safeguard the interests of debt mutual fund investors, SEBI introduced a regulation in June 2021 under which fund houses will have to inform debt fund investors about the maximum risk that a debt scheme can take. The regulation came into effect on 1 December 2021. 

Under the new guidelines, mutual funds will have to classify their existing debt schemes and new schemes in a potential risk class (PRC) matrix based on the maximum risk that the fund might take in the future. 

The objective is to equip debt fund investors to make an informed decision by educating them about the potential risks of the specific debt fund in which they are invested or planning to invest. 

What is the Potential Risk Class (PRC) Matrix?

PRC matrix defines the extreme level of potential risk a debt-mutual fund can take. Your investments in debt mutual funds are exposed to credit risk and interest rate risk. Interest rate risk is the risk of a fall in the value of a fund because of a decrease in the price of the underlying bonds. 

Now that we know the risk categories, let’s find out how a PRC matrix categorizes different debt schemes. Macaulay Duration (MD) and Credit Risk Value (CRV) are the two bases for categorizing debt funds. While Macaulay Duration (MD) determines the interest rate risk, Credit Risk Value (CRV) helps assess credit risk.

MD is the duration in which the investor would fully realize the price paid for the bonds held by the debt fund in the form of interest payments and principal repayments. MD is calculated in years, and a lower MD accounts for a lower interest rate risk. So if there are multiple securities in a scheme, the weighted average MD of all the schemes is taken as the MD for the scheme.

MD Classification for Debt Funds

  • Class I- MD of up to 1 year (potential interest rate risk is the lowest)
  • Class II- MD of up to 3 years (potential interest rate risk is moderate)
  • Class III- Any other MD (potential interest rate risk is the highest)

Determining credit risk for debt schemes is pretty straightforward; SEBI has assigned Credit Risk Value (CRV) to different debt securities. Credit risk shares an indirect relationship with CRV; the higher the CRV, the potential credit risk is lower, and the converse is also true.

For instance, government securities are assigned a CRV of 13, while AAA-rated securities bear a CRV of 12, and unrated securities are given a CRV of 2.

CRV Classification of Debt Funds 

  • Class A – Securities having CRV equal to or greater than 12 (lowest potential credit risk)
  • Class B- Securities having CRV of 10 and 11 (moderate potential credit risk)
  • Class C- Securities have CRV below 10 (highest potential credit risk)

As an investor, you can refer to the SEBI’s circular titled Potential Risk Class Matrix for Debt Schemes based on interest rate risk and credit risk’  by clicking on the link. 

Conclusion

SEBI is the sole entity responsible for governing Indian capital markets and the mutual fund industry. Its main objectives are to secure investor interests and promote transparency in the Indian equity market. The regulator drafts guidelines and frameworks for the efficient functioning of SEBI-registered entities to ensure their smooth functioning. 

FAQs

What is SEBI and its function?

SEBI is a statutory regulatory body that was established by the Government of India in 1992 to protect the interests of investors investing in securities and to regulate the securities market. SEBI also oversees the functioning of the mutual fund industry.

Who is the Chairperson of SEBI?

Currently, Madhabi Puri Buch is the chairperson of SEBI. She is the first woman chairperson to lead SEBI, and also SEBI’s first non-IAS chairperson.

Is SEBI a government organization?

The Securities and Exchange Board of India was constituted in 1988 as the capital markets regulator. SEBI became an autonomous and statutory body in 1992 following the passage of the SEBI Act by Parliament.

What are the functions of SEBI in India?

SEBI was established to regulate the working of the markets and to reduce and eliminate malpractices. SEBI’s board consists of nine members. The regulations of the SEBI Act confer this autonomous body three kinds of powers: quasi-judicial, quasi-legislative, and quasi-executive.

Who regulates the SEBI?

The SEBI is managed by its board of members, headed by a chairman nominated by the Union government.

Disclaimer: Risk is fundamental to the investment process in Indian stocks. Any discussion of securities in this article should not be considered a recommendation to buy or sell any security. The facts provided are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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