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The pace of economic development of any country is greatly influenced by
capital formation, as it is the kingpin of economic advancement. And, the
most important source of capital formation is the capital market which
pools the capital resources of the country. Capital market, however, is a
complex place fraught with risks which a small investor cannot afford to
take. There are innumerable factors which constantly influence the
behaviour of the capital market .The Securities and Exchange Board
of India (frequently abbreviated SEBI) is the regulator for the securities
market in India. It was established in the year 1988 and given statutory
powers on 12 April 1992 through the SEBI Act, 1992.With the
announcement of the reforms package in 1991, the volume of business in
both the primary and secondary segment of the capital market has been
increased enormously till now.
A multi crore securities scam rocked the Indian financial system in
1992(Harshad Mehta scam). The then existing regulatory framework was
found to be fragmented and inadequate and hence, a need for an
autonomous, statutory, and integrated organization to ensure the smooth
functioning of capital market was felt. To fulfil this need, the Securities and
Exchange Board of India (S.E.B.I), which was already in existence since
April 1988, was conferred statutory powers to regulate the capital market.

Initially SEBI was a non statutory body without any statutory power.
However in the year of 1995, the SEBI was given additional statutory
power by the Government of India through an amendment to the
Securities and Exchange Board of India Act 1992. In April, 1998 the SEBI
was constituted as the regulator of capital markets in India under a
resolution of the Government of India.
The SEBI is managed by its members, which consists of following:

a) The chairman who is nominated by Union Government of India.

b) Two members, i.e. Officers from Union Finance Ministry.
c) One member from The Reserve Bank of India.
d) The remaining 5 members are nominated by Union Government of
India, out of them at least 3 shall be whole-time members.

The primary objective of SEBI to promote healthy and orderly growth of
securities market and investor protection. The objectives of SEBI are

To protect the interest of investors, so that there is a steady flow of

saving into the capital market.

To regulates the securities market and ensure the fair practices.

To promote efficient services by brokers, merchant bankers and

other intermediaries, so that, they become competitive and


The Preamble of the Securities and Exchange Board of India describes the
basic functions of the Securities and Exchange Board of India as "
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 has to be responsive to the needs of three groups, which constitute
the market:

The issuers of securities

The investors

The market intermediaries.

Mutual Funds
Mutual funds are financial intermediaries which collect the savings of
investors and invest them in a large and well diversified portfolio of
securities. The major advantages for the investors are reduction in risk,
expert professional management, diversified portfolio and tax benefit. By
pooling of their assets through Mutual Funds, Investors achieve economies
of scale. Mutual Funds are to be established in the form of Trust under
Indian Trust Act, and are to be operated by Asset Management Company
(AMC). Mutual Funds dealing exclusively with Money Market Instruments
are to be regulated by RBI. Mutual Funds dealing primarily with capital
market and also partly in Money Market Instruments are to be regulated
by SEBI. All schemes floated by Mutual Funds are to be registered with

SEBI Regulation on Mutual Funds:

Securities & Exchange Board of India had issued a set of regulations and
code of conduct as SEBI (Mutual Fund) Regulations, 1996 on 9 th December
1996 for the smooth conduct and regulation of mutual funds. Recently,
SEBI has issued updated regulations as SEBI (Mutual fund) Regulations
2011 on 07 Jan 2012 covering all amendments up to Dec 2011. These
guidelines lay down certain criteria for investment, disclosure,
accountability and distribution of profits to its members. The salient
features of these regulations include various aspects relating to
Registration of Mutual Fund, Constitution and management of mutual fund
& rights and obligations of trustees, Constitution and management of
Asset Management Company and custodian, Restrictions on business
activities of AMC and its obligations, Schemes of mutual fund, Investment
objectives and valuation policies, Advertisement code, Code of conduct,
Restrictions on investments, Investment valuation norms, Accounts and
Offer documents.

Literature review
HEMANTHA GOPI (2012) found that the SEBI should stop being preoccupied with day-to-day regulations and become more of a visionary. The
SEBI can ensure a free and fair market and take India into league of major
global capital markets in the next round of reforms. To enable this, it has
to thoroughly review its structure and functioning. The SEBI has to balance
between the costs of regulation and market development. There should be
cross-border cooperation between various regulators and between
regulators and industry.
James P. M. and Narayanan K.S.Manoj (2010) Mutual Funds is to
provide better returns to investors by minimizing the risk associated with
capital market investment. The Mutual Fund industry has been in
operation in India since 1964 and it occupies a pivotal place in Indian
Capital Market for mobilising small savings and channelising it to the field
of investment. Though there has been a tremendous growth in the Mutual
Fund industry in India over the four decades of its existence, there has
been violent fluctuations and even negative growth in some years.
Securities and Exchange Board of India (SEBI), the watch and ward of
Indian Capital Market has come out with separate regulations for the
organisation and operation of mutual funds and thereby has been to an
extent successful in bringing the mutual fund industry to the right track.
Kumar Aayush, Pegu Dhiren, Shashank Prateeti Goyal The scope of
the standards required to be adhered to under the FII Regulations is very
widely worded as a result of which the regulations become vague. It thus
becomes impossible to determine the content of the provisions which in
turn makes it impossible to fix the responsibility. Thus, for effective
enforcement of FII Regulations, it is extremely important that this loophole
be plugged to provide clarity to the scope of law governing the FIIs.

Singh Rajiv Kumar (2012) analyse whether SEBI is able to regulate the
activities in Mutual Fund Market and whether its regulatory role is capable
to protect the interest of huge investors. This study also attempts to
analyse the shortcomings (if any) in the regulatory regime and suggest
some measure to increase its effectiveness. The advantages for the
investors are reduction in risk, expert professional management,
diversified portfolio, liquidity of investment and tax benefit. This fast
grown industry is regulated by the Securities and Exchange Board of India

Analysis and Findings

From a single-player monopoly in 1964, the Indian mutual fund industry has
evolved into a high growth and competitive market on the back of favourable
economic and demographic factors. As of August 2012, 44 asset management
companies (AMCs) were operating in India with assets under management (AUM)
of INR 6.4 trillion. However, after several years of persistent growth, the industry
witnessed consistent declines of 6.3 percent and 5.1 percent in its AUM during
FY11 and FY12, respectively1. One of the reasons could be the changes in
regulatory guidelines-example ban on entry load, stringent KYC norms, guidelines
on transaction charges, tightening valuation and advertisement norms - which
were introduced in a short span of time thus giving less time to the industry to
adjust in the new environment.

Further, the penetration of mutual funds in India (as measured by the AUM/GDP
ratio) remains low at 4.7 percent as compared to 77.0 percent in the US, 41.1
percent in Europe and 33.6 percent in the UK. Mutual funds also constituted only
3.3 percent of households financial savings in FY10, which further contracted to
-1.2 percent and -1.1 percent in FY11 and FY12, respectively, due to large
redemption and capital losses.

Besides low penetration, concentration of mutual funds to a few major cities

has been another concern for the sector. Most AMCs and distributors have
limited focus beyond the top 20 cities, as is evident from the limited
distribution channels and limited investor servicing available beyond these
cities. The top five cities contributed approximately 71.1 percent of the total
AUM of the mutual fund sector, with Mumbai only accounting for about 42.1
percent in FY12. Lack of incentives for distributors to expand in small cities
has resulted in mutual funds becoming an investment product in the hands of
urban Indians.
Such challenges have led the Securities and Exchange Board of India (SEBI)
to adopt certain measures to re-energize the mutual fund industry with an
objective to restore sustainable high growth for the sector. To start with, AMCs
are allowed to charge an additional total expense ratio (TER) upto 30 bps, if
30 percent of their net sales or 15 percent of their AUM (whichever is higher)
originates beyond the top 15 cities. If inflow from beyond the top 15 cities is
less than 30 percent of net sales or 15 percent of AUM, the proportionate
amount will be allowed as additional TER. While this step may reduce
investors returns in the short term it may give AMCs more scope to
incentivize distributors to expand their geographical reach. SEBI has also
decided that AMCs should not bear the service tax (12.36 percent) payable
on investment and advisory fees; instead, it can be charged in addition to the
TER. This move is in line with the SEBIs attempt to bring the mutual fund
sector at par with other sectors.
In short-term, investors returns may be affected due to this move but
investors are bound to gain in the long-term as AUM increases. In order to
help AMCs widen their customer base in tier-IV to tier-VI cities, SEBI has also
relaxed the mandatory requirement of a permanent account number (PAN)
card or bank account for cash investments of up to INR 20,000 per financial
year. Further, the regulators recommendation to include equity mutual fund
schemes under the Rajiv Gandhi Equity Savings Scheme (RGESS) that offers
tax breaks to small investors could help AMCs attract new investors in capital

In another step to stimulate the distribution network, SEBI has proposed to

simplify the distributors registration process and widen the distributor by
including postal agents, retired officials from government, banks, retired
teachers and other similar professionals (such as bank correspondents) for
the distribution of simple products. Although this could help AMCs expand
their footprint, they will need to be cautious of the increased risk of misselling schemes due to lack of knowledge on investors part. SEBI has
introduced various levels of certification and registration depending on
products and services offered, but a mechanism to monitor compliance by
the individuals must be identified.
SEBI has also mandated a single expense structure under a single plan to
eliminate differential treatment between retail and institutional investors.
However, to promote direct investment and to be fair to direct investors, a
separate plan for direct investments with a lower expense ratio and a
separate net asset value (NAV) has been proposed. One of the outcomes of
this step could be less distributors commissions as many institutional clients
who are major investors and are well-informed may prefer the direct route.
But on the other hand, retail investors who need help to select the most
suitable scheme and complete requisite paperwork would still invest through
a distributor. Low customer awareness and financial literacy are one of the
biggest roadblocks in channelizing household savings into mutual funds. In a
bid to enhance customer awareness, SEBI has mandated AMCs to set aside at
least 2 bps of their daily net assets annually for the investor education
campaign. AMCs should also make disclosures regarding the investor
education and awareness initiatives undertaken. To further strengthen the
regulatory framework and to make it increasingly transparent, SEBI has asked
AMCs to upload monthly portfolio disclosures and half-yearly financial results
on their websites. It has also mandated AMCs to report additional annual
disclosures such as gross inflow, net inflow, average AUM, and distributorwise gross inflow on their websites. The regulator has also asked its panel to
study regulatory provisions in some of the international jurisdictions (such as
the US and the UK) to propose ways to increase inflow to mutual funds. The
report is expected to be released in the next three to four months.
While SEBI has announced various measures to increase the penetration and
improve the distribution network, increasingly liberal TER with fungibility was
expected. Currently, equity mutual funds can charge a maximum of 2.5
percent as TER, of which 1.25 percent may be allocated as fund management
fees/charges and other expenses (such as marketing, distribution and
operations) each. Any expense above 2.5 percent has to be borne by the
AMC. Initially, SEBI proposed the removal of sub-limits on expenses, giving
AMCs the freedom to allocate the 2.5 percent TER the way they wanted to.
This could have helped AMCs to incentivize distributors more effectively and
attract them to sell mutual funds more actively, which was hampered after
the ban on entry loads.
To summarize, enhancing TER (up to 30 bps) and charging service tax
separately are expected to help fund houses improve their reach and
energize the distribution network. Although investors returns will likely be
compromised in the short term, enhanced presence and a rejuvenated
distribution network are likely to be beneficial for investors in the long term.

Relaxing KYC norms for small investors, widening the distributor network to
include postal agents and retired officials, and recommending the inclusion of
equity scheme mutual fund products under REGSS could help strengthen the
last-mile connectivity in mutual fund distribution. Through its recent
initiatives and announcements, SEBI has given a much needed boost to the
mutual fund sector but the industry is waiting for a long term initiative by the
regulator that will put this sector amongst the most preferred instrument of

Singh Rajiv Kumar (2012), Role of Securities & Exchange Board of India
(SEBI) in Regulating Mutual Funds International Journal of Trade and
Commerce, January-June 2012, Volume 1,No. 1.
EMPIRICAL ANALYSIS, International Journal of Multidisciplinary Research,
Vol.2 Issue 3.
James P. M. and Narayanan K.S.Manoj (2010), Role of Sebi in Regulation
of Mutual Funds, Journal of Interdisciplinary Studies and Research, Vol. XI
No. 2.
Kumar Aayush, Pegu Dhiren, Shashank Prateeti Goyal, ROLE OF SEBI
RBI Annual Report FY12
AUM by geography, AMFI, March 2012
Steps to re-energize Mutual Fund Industry, SEBI. September 2012