Functioning of Mutual funds in India

The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in 1988 and given statutory powers on 30 January The SEBI Act was enacted in 1992.

Initially, SEBI was a non-statutory organization with no statutory powers. However, in 1992, the Government of India amended the Securities and Exchange Board of India Act, 1992, to provide the SEBI more statutory competence. According to a decision passed by the Government of India in April 1988, the SEBI was established as India’s capital market regulator.

Its principal goal was to encourage the orderly and healthy expansion of securities while also protecting investors.

The primary goal is to establish an environment that promotes the effective mobilization and distribution of resources via the securities market. This environment includes laws and regulations, a policy framework, procedures, and infrastructures designed to suit the demands of the market’s three primary groups: securities issuers (businesses), investors, and market intermediaries.

(i) To the issuers

SEBI seeks to give issuers with a market place where they can safely expect to raise the necessary amount of money in a simple and effective way.

(ii) SEBI intends to safeguard investors’ rights and interests by regularly providing accurate and reliable information.

(iii) To the intermediaries

SEBI offers a competitive, professionalized, and developing market with enough and efficient infrastructure to allow intermediaries to deliver better service to investors and issuers.

SEBI Guidelines

1) Formation:

Certain structural changes have also been made in the mutual fund industry, including the requirement for mutual funds to establish asset management companies with fifty percent independent directors, separate board of trustee companies with at least fifty percent independent trustees, and appoint independent custodians.

This is to establish an arm’s length connection between trustees, fund managers, and custodians, as opposed to the previous scenario in which all three tasks were often done by a single organization, typically the fund’s sponsor or a subsidiary of the sponsor.

Thus, regulators have made the process of creating and floating mutual funds a tripartite activity. The trustees, asset management firms (AMCs), and mutual fund shareholders comprise the three legs. SEBI standards require trustees to maintain an arm’s length relationship with AMCs and do all necessary to protect investors’ rights.

With funds managed by AMCs and asset custody retained by trustees, there is an aspect of risk balancing since both can keep an eye on each other.

(2) Registration: In January 1993, SEBI mandated mutual fund registration, considering a sponsor’s track record, honesty in business dealings, and financial soundness before giving approval.

This would limit the expansion of mutual funds and safeguard investors’ interests by registering only solid promoters with a demonstrated track record and financial strength. In February 1993, SEBI approved six private sector mutual funds: 20th Century Finance Corporation, Industrial Credit & Investment Corporation of India, Tata Sons, Credit Capital Finance Corporation, Ceat Financial Services, and Apple Industries.

(3) paperwork: SEBI requires vetting of mutual fund offer paperwork and plan details. A standardized structure for mutual fund prospectuses is being developed.

(4) Mutual funds must follow a code of advertising.

(5) Assurance of returns: SEBI has updated the Securities Control and Regulations Act, which governs mutual funds. Mutual funds were no longer able to provide any assurances about the returns they would provide. However, following pressure from mutual funds, SEBI changed the standards, allowing for promises of return subject to specific circumstances.

As a result, only mutual funds that have been on the market for at least five years may guarantee a maximum return of 12% for one year. SEBI, by default, gave public sector mutual funds an edge over newly established private mutual funds.

According to fundamental investment principles, investments in the capital market have a certain level of risk, and any investor engaging in the markets, whether for capital gain or otherwise, should be prepared to accept the risks of loss.

(6) Minimum corpus: According to SEBI standards, mutual funds need a minimum start-up corpus of Rs.50 crore for open-ended schemes and Rs.20 crore for closed-ended schemes. Failure to meet this requirement would result in application money being returned.

The rationale for submitting such a request to SEBI is that in the past, minimum corpus requirements compelled AMCs to seek capital from corporate organizations, reducing mutual funds to quasi-portfolio management firms. In reality, the Association of Mutual Funds in India (AMFI) has frequently urged regulatory authorities to remove the minimum corpus criteria.

SEBI has been working to institutionalize the market via measures such as proportional allocation and raising the minimum deposit amount to Rs.5000 in recent years. These activities aim to redirect individual investors’ investments into mutual funds.

In November 1992, SEBI extended the time restriction for mutual funds to invest cash from tax-saving programs from six to nine months. The rule was published to prevent mutual funds from the disadvantage of investing in the bullish market at exorbitant prices and then suffering from low NAVs.

(9) Money market investment: According to SEBI guidelines, mutual funds can invest up to 25% of their resources in money-market instruments within the first six months of closing, and 15% after six months to meet short-term liquidity requirements.

Following this year’s budget, private sector mutual funds were granted access to the call money market for the first time. However, due to SEBI restrictions that limit their exposure to money markets, mutual funds are not prominent participants in the call money market. Thus, mutual funds have little influence on the call money market.

(10) Investment valuation: Transparent and easy-to-understand Net Asset Values (NAVs) of mutual fund schemes are crucial for presenting investors with performance information. SEBI has already cautioned several mutual funds about the unhealthy market.

(11) SEBI inspects mutual funds every year. A complete SEBI examination of all 27 mutual funds was suggested for March 1996 in order to simplify operations and safeguard investors’ interests. SEBI monitors and inspects mutual funds to ensure they comply with rules.

(12) Underwriting: In July 1994, SEBI allowed mutual funds to underwrite primary issues as part of their investing activities. This approach may aid mutual funds in diversifying their operations.

(13) Conduct: In September 1994, SEBI specified that mutual funds cannot provide buyback plans or guaranteed returns to corporate investors. The regulations regulating mutual funds and portfolio managers maintain openness in their operations.

In September 1993, mutual funds were granted voting privileges. The Department of Company Affairs apparently allowed mutual funds the opportunity to vote as full shareholders in enterprises where they have equity assets.

SEBI’s aims

(1) SEBI regulates stock exchanges to provide efficient services for all parties involved.

(2) Investor Protection: The capital market relies on investors to function. Therefore, it is vital to defend the interests of investors.

The protection of investors’ interests include safeguarding them from inaccurate information provided by corporations in their prospectuses, lowering the risk of delivery and payment, and so on. As a result, the primary goal of the SEBI is to guarantee security to investors.

(3) Checking Insider Trading: Insider trading refers to the purchase and sale of stocks by corporate directors, promoters, and others who possess confidential information about the firm and want to profit from it.

This harms the interests of regular investors. It was critical to monitor this inclination. Many precautions have been made to prevent insider trading via the SEBI.

(4) Control of Brokers:

Controlling the capital market requires keeping a check on the activity of brokers and other intermediaries. To maintain control over them, the SEBI had to be established.