securities and exchang board of india

8/3/2019 Securities and Exchang Board of India

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JitendraVirahy

[email protected]


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APROJECT REPORT

ON

Securities And Exchange Board Of India

Submitted to Submitted by

DR. SONAL JAIN HHH

DEEPSHIKHA COLLEGE OF TECHNICAL EDUCATION, JAIPUR(RAJ.)


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CONTENTS

1 INTRODUCTION

2 NEED OF SEBI

3 SEBI REGULATION AND REGULATORY

SEBI RAGULATES

PRIMARY MARKET

SECONDARY MARKET

MUTUAL FUND

FOREIGN INSTITUTION INVESTMENT

4 ESSENCE OF SEBI GUIDELINES

5 POWERS OF SEBI

6 RECOMANDATIONS


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INTRODUCTION

In 1988 the Securities and Exchange Board of India (SEBI) wasestablished by the Government of India through an executive resolution, and was

subsequently upgraded as a fully autonomous body (a statutory Board) in theyear 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 statutoryand autonomous regulatory board with defined responsibilities, to cover bothdevelopment & regulation of the market, and independent powers have been setup. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.

Since its inception SEBI has been working targetting the securities and isattending 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 creditand also reduced the market.


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SEBI has introduced the comprehensive regulatory measures, prescribedregistration norms, the eligibility criteria, the code of obligations and the code ofconduct 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, surveillancesystem etc. which has made dealing in securities both safe and transparent tothe end investor.

Another significant event is the approval of trading in stock indices (likeS&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effectiveproduct 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 thenational level, and also to diversify the trading products, so that there is anincrease in number of traders including banks, financial institutions, insurancecompanies, mutual funds, primary dealers etc. to transact through theExchanges. In this context the introduction of derivatives trading through IndianStock Exchanges permitted by SEBI in 2000 AD is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend theregulatory framework for derivatives trading and suggest bye-laws for Regulationand Control of Trading and Settlement of Derivatives Contracts. The Board ofSEBI in its meeting held on May 11, 1998 accepted the recommendations of the

committee and approved the phased introduction of derivatives trading in Indiabeginning with Stock Index Futures. The Board also approved the "SuggestiveBye-laws" as recommended by the Dr LC Gupta Committee for Regulation andControl of Trading and Settlement of Derivatives Contracts.

SEBI then appointed the J. R. Verma Committee to recommend RiskContainment Measures (RCM) in the Indian Stock Index Futures Market. Thereport was submitted in november 1998.

However the Securities Contracts (Regulation) Act, 1956 (SCRA) requiredamendment to include "derivatives" in the definition of securities to enable SEBIto introduce trading in derivatives. The necessary amendment was then carried

out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999was introduced. In December 1999 the new framework was approved.

Derivatives have been accorded the status of `Securities'. The banimposed on trading in derivatives in 1969 under a notification issued by theCentral Government was revoked. Thereafter SEBI formulated the necessaryregulations/bye-laws and intimated the Stock changes in the year 2000. Thederivative trading started in India at NSE in 2000 and BSE started trading in theyear 2001.


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NEED FOR HARMONISATION

The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] laysdown the overall regulatory framework for registration and operations of venturecapital funds in India.

Overseas venture capital investments are subject to the Government ofIndia Guidelines for Overseas Venture Capital Investment in India datedSeptember 20, 1995.

For tax exemptions purposes venture capital funds also needs to complywith the Income Tax Rules made under Section 10(23FA) of the Income Tax Act.In addition to the above, offshore funds also require FIPB/RBI approval for

investment in domestic funds as well as in Venture Capital Undertakings(VCU).Domestic funds with offshore contributions also require RBI approval for thepricing of securities to be purchased in VCU likewise, at the time ofdisinvestment, RBI approval is required for the pricing of the securities.


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SEBI REGULATION

The multiple set of Guidelines and other requirements have createdinconsistencies and detract from the overall objectives of development of VentureCapital industry in India. All the three set of regulations prescribe differentinvestment criteria for VCFs as under :

SEBI regulations permit investment by venture capital funds in equity orequity related instruments of unlisted companies and also in financially weak andsick industries whose shares are listed or unlisted. The Government of Indiaguidelines and the Income Tax Rules restrict the investment by venture capitalfunds only in the equity of unlisted companies.

SEBI Regulations provide that atleast 80% of the funds should be investedin venture capital companies and no other limits are prescribed. The Income TaxRule until now provided that VCF shall invest only upto 40% of the paid-upcapital of VCU and also not beyond 20% of the corpus of the VCF. TheGovernment of India guidelines also prescribe similar restriction. Now the IncomeTax Rules have been amended and provides that VCF shall invest only upto 25%of the corpus of the venture capital fund in a single company.


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SEBI Regulations do not provide for any sectoral restrictions forinvestment except investment in companies engaged in financial services.

The Government of India Guidelines also do not provide for any sectoral

restriction, however, there are sectoral restrictions under the Income Taxguidelines which provide that a VCF can make investment only in companiesengaged in the business of software, information technology, production of basicdrugs in pharmaceutical sector, bio-technology, agriculture and allied sector andsuch other sectors as notified by the Central Government in India and forproduction or manufacture of articles or substance for which patent has beengranted by National Research Laboratory or any other scientific researchinstitution approved by the Department of Science and Technology, if the VCFintends to claim Income Tax exemption. Infact, erstwhile Section 10(23F) ofIncome Tax Act was much wider in its scope and permitted VCFs to invest inVCUs engaged in various manufacture and production activities also. It was onlyafter SEBI recommended to CBDT that atleast in certain sectors as specified inSEBIs recommendations, the need for dual registration approval of VCF shouldbe dispensed with, CBDT instead of dispensing with the dual requirement,restricted investment to these sectors only. This has further curtailed theinvestment flexibility.

The Income Tax Act provides tax exemptions to the VCFs under Section10(23FA) subject to compliance with Income Tax Rules. The Income Tax Rulesinter alia provide that to avail the exemption under Section 10(23FA), VCFs needto make an application to the Director of Income Tax (Exemptions) for approval.One of the conditions of approval is that the fund should be registered with SEBI.Rule 2D also lays down conditions for investments and section 10(23FA) lays

down sectors in which VCF can make investment in order to avail taxexemptions. Once a VCF is registered with SEBI, there should be no separaterequirement of approval under the Income Tax Act for availing tax exemptions.This is already in practice in the case of mutual funds.

The concurrent prevalence of multiple sets of guidelines / requirements ofdifferent organisations has created inconsistencies and also the negativeperception about the regulatory environment in India. Since SEBI is responsiblefor overall regulation and registration of venture capital funds, the need is toharmonise and consolidate within the framework of SEBI Regulation to providefor uniform, hassle free, one window clearance. A functional and successfulpattern is already available in this regard in the case of mutual funds which are

regulated through one set of regulations under SEBI Mutual Fund Regulations.Once a mutual fund is registered with SEBI, it automatically enjoys tax exemptionentitlement. Similarly, in the case of FIIs tax benefits and foreign inflow/ outfloware automatically available once these entities are registered with SEBI.


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It is therefore necessary that there is a single regulatory framework underSEBI Act for registration and regulation of VCFs in India. It may be mentionedthat Government of India Guidelines were framed on September 20, 1995 andSEBI regulations were framed in 1996 pursuant to the amendment in the SEBIAct in 1995 giving SEBI the mandate to frame regulations for venture capital

funds. After the notification of SEBI regulations, separate GOI Guidelines forventure investments should have been repealed. Further, once a VCF includingthe fund having contribution from off shore investors, is registered with SEBI, theinflows and outflows of funds should be under transparent automatic route andthere should be no need for separate FIPB / RBI approvals in the matters ofinvestments, entry / exit pricing. Likewise, VCF once registered with SEBI shouldbe entitled for automatic tax exemptions as in the case of mutual funds. Suchsingle regulatory requirement would provide much needed investment andoperational flexibility, make the perception of foreign investors positive andcreate the required environment for increased flow of funds and growth of theventure capital industry in India.

SEBI regulations provides flexibility in selection of investment to the VCF,however, in the event of subscription to the fund by an overseas investor or thefund choosing to seek income tax exemptions, the investment flexibility iscurtailed to a great extent. It is worth mentioning that one of the condition forgrant of approval under the Income Tax Rules for seeking exemption under theIncome Tax Act is that the fund should be registered with SEBI which make itobligatory on the venture capital fund not only to follow Income Tax Rules butalso the SEBI Regulations. Further, a VCF has to seek separate registrationunder the SEBI Act and approval under the Rules of Income Tax apart fromseeking approval from FIPB / RBI in the event of subscription to the fund by anoverseas investor.


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PRIMARY MARKET

The primary market is that part of the capital markets that deals with theissue of new securities. Companies, governments or public sector institutions can

obtain funding through the sale of a new stock or bond issue. This is typicallydone through a syndicate of securities dealers. The process of selling new issuesto investors is called underwriting. In the case of a new stock issue, this sale isan initial public offering (IPO). Dealers earn a commission that is built into theprice of the security offering, though it can be found in the prospectus. Primarymarkets creates long term instruments through which corporate entities borrowfrom capital market.

Features of primary markets are:

This is the market for new long term equity capital. The primary market isthe market where the securities are sold for the first time. Therefore it is alsocalled the new issue market (NIM).

In a primary issue, the securities are issued by the company directly toinvestors.

The company receives the money and issues new security certificates tothe investors.

Primary issues are used by companies for the purpose of setting up newbusiness or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capitalformation in the economy.

The new issue market does not include certain other sources of new longterm external finance, such as loans from financial institutions. Borrowers in thenew issue market may be raising capital for converting private capital into publiccapital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Initial public offering; Rights issue (for existing companies); Preferential issue.


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SECONDARY MARKET

The secondary market, also known as the aftermarket, is the financialmarket where previously issued securities and financial instruments such asstock, bonds, options, and futures are bought and sold. The term "secondarymarket" is also used to refer to the market for any used goods or assets, or analternative use for an existing product or asset where the customer base is thesecond market (for example, corn has been traditionally used primarily for foodproduction and feedstock, but a "second" or "third" market has developed for usein ethanol production). Another commonly referred to usage of secondary marketterm is to refer to loans which are sold by a mortgage bank to investors such asFannie Mae and Freddie Mac.

With primary issuances of securities or financial instruments, or theprimary market, investors purchase these securities directly from issuers such as

corporations issuing shares in an IPO or private placement, or directly from thefederal government in the case of treasuries. After the initial issuance, investorscan purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans tostocks, from fragmented to centralized, and from illiquid to very liquid. The majorstock exchanges are the most visible example of liquid secondary markets - inthis case, for stocks of publicly traded companies. Exchanges such as the NewYork Stock Exchange, Nasdaq and the American Stock Exchange provide acentralized, liquid secondary market for the investors who own stocks that tradeon those exchanges.


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Functions

Secondary marketing is vital to an efficient and modern capital market. Inthe secondary market, securities are sold by and transferred from one investor orspeculator to another. It is therefore important that the secondary market behighly liquid (originally, the only way to create this liquidity was for investors andspeculators to meet at a fixed place regularly; this is how stock exchangesoriginated, see History of the Stock Exchange).

As a general rule, the greater the number of investors that participate in agiven marketplace, and the greater the centralization of that marketplace, themore liquid the market.

Fundamentally, secondary markets mesh the investor's preference forliquidity (i.e., the investor's desire not to tie up his or her money for a long periodof time, in case the investor needs it to deal with unforeseen circumstances) withthe capital user's preference to be able to use the capital for an extended period

of time.

Accurate share price allocates scarce capital more efficiently when newprojects are financed through a new primary market offering, but accuracy mayalso matter in the secondary market because: 1) price accuracy can reduce theagency costs of management, and make hostile takeover a less risky propositionand thus move capital into the hands of better managers, and 2) accurate shareprice aids the efficient allocation of debt finance whether debt offerings orinstitutional borrowing.

Related usage

The term may refer to markets in things of value other than securities. Forexample, the ability to buy and sell intellectual property such as patents, or rightsto musical compositions, is considered a secondary market because it allows theowner to freely resell property entitlements issued by the government. Similarly,secondary markets can be said to exist in some real estate contexts as well (e.g.ownership shares of time-share vacation homes are bought and sold outside ofthe official exchange set up by the time-share issuers). These have very similarfunctions as secondary stock and bond markets in allowing for speculation,providing liquidity, and financing through securitization.

Private Secondary Markets

Partially due to increased compliance and reporting obligations enacted inthe Sarbanes-Oxley Act of 2002, private secondary markets began to emerge.These markets are generally only available to institutional or accredited investorsand allow trading of unregistered and private company securities.


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In private equity, the secondary market (also often called private equitysecondaries or secondaries) refers to the buying and selling of pre-existinginvestor commitments to private equity funds.

MUTUAL FUNDS

A mutual fund is a professionally managed type of collective investmentscheme that pools money from many investors and invests typically ininvestment securities (stocks, bonds, short-term money market instruments,other mutual funds, other securities, and/or commodities such as preciousmetals). 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 theU.S., a fund registered with the Securities and Exchange Commission (SEC)under both SEC and Internal Revenue Service (IRS) rules must distribute nearlyall of its net income and net realized gains from the sale of securities (if any) toits investors at least annually. Most funds are overseen by a board of directors ortrustees (if the U.S. fund is organized as a trust as they commonly are) which ischarged with ensuring the fund is managed appropriately by its investmentadviser and other service organizations and vendors, all in the best interests ofthe fund's investors.

Massachusetts Investors Trust (now MFS Investment Management) wasfounded on March 21, 1924, and, after one year, it had 200 shareholders and$392,000 in assets. The entire industry, which included a few closed-end funds,represented less than $10 million in 1924.

The stock market crash of 1929 hindered the growth of mutual funds. Inresponse to the stock market crash, Congress passed the Securities Act of 1933and the Securities Exchange Act of 1934. These laws require that a fund beregistered with the U.S. Securities and Exchange Commission (SEC) andprovide prospective investors with a prospectus that contains requireddisclosures about the fund, the securities themselves, and fund manager. TheInvestment Company Act of 1940 sets forth the guidelines with which all SEC-registered funds must comply.

With renewed confidence in the stock market, mutual funds began toblossom. By the end of the 1960s, there were approximately 270 funds with $48billion in assets. The first retail index fund, First Index Investment Trust, wasformed in 1976 and headed by John Bogle, who conceptualized many of the keytenets of the industry in his 1951 senior thesis at Princeton University. It is nowcalled the Vanguard 500 Index Fund and is one of the world's largest mutualfunds, with more than $100 billion in assets.


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A key factor in mutual-fund growth was the 1975 change in the InternalRevenue Code allowing individuals to open individual retirement accounts(IRAs). Even people already enrolled in corporate pension plans could contributea limited amount (at the time, up to $2,000 a year). Mutual funds are now popularin employer-sponsored "defined-contribution" retirement plans such as (401(k)s)

and 403(b)s as well as IRAs including Roth IRAs.As of October 2007, there are 8,015 mutual funds that belong to the

Investment Company Institute (ICI), a national trade association of investmentcompanies in the United States, with combined assets of $12.356 trillion. In early2008, the worldwide value of all mutual funds totaled more than $26 trillion.

Since the Investment Company Act of 1940, a mutual fund is one of threebasic types of investment companies available in the United states.

Mutual funds may invest in many kinds of securities (subject to itsinvestment objective as set forth in the fund's prospectus, which is the legaldocument under SEC laws which offers the funds for sale and contains a wealth

of information about the fund). The most common securities purchased are"cash" or money market instruments, stocks, bonds, other mutual fund sharesand more exotic instruments such as derivatives like forwards, futures, optionsand swaps. Some funds' investment objectives (and or its name) define the typeof investments in which the fund invests. For example, the fund's objective mightstate "...the fund will seek capital appreciation by investing primarily in listedequity securities (stocks) of U.S. companies with any market capitalizationrange." This would be "stock" fund or a "domestic/US stock" fund since it statedU.S. companies. A fund may invest primarily in the shares of a particular industryor market sector, such as technology, utilities or financial services. These areknown as specialty or sector funds. Bond funds can vary according to risk (e.g.,

high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g.,government agencies, corporations, or municipalities), or maturity of the bonds(short- or long-term). Both stock and bond funds can invest in primarily U.S.securities (domestic funds), both U.S. and foreign securities (global funds), orprimarily foreign securities (international funds). Since fund names in the pastmay not have provided a prospective investor a good indication of the type offund it was, the SEC issued a rule under the '40 Act which aims to better alignfund names with the primary types of investments in which the fund invests,commonly called the "name rule". Thus, under this rule, a fund must invest undernormal circumstances in at least 80% of the securities referenced in its name. forexample, the "ABC New Jersey Tax Free Bond Fund" would generally have to

invest, under normal circumstances, at least 80% of its assets in tax-exemptbonds issued by the state of New Jersey and its political subdivisions. Some fundnames are not associated with specific securities so the name rule has lessrelevance in those situations. For example, the "ABC Freedom Fund" is such thatits name does not imply a specific investment style or objective. Lastly, an indexfund strives to match the performance of a particular market index, such as theS&P 500 Index. In such a fund, the fund would invest in securities and likely


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specific derivates such as S&P 500 stock index futures in order to most closelymatch the performance of that index.

Most mutual funds' investment portfolios are continually monitored by oneor more employees within the sponsoring investment adviser or managementcompany, typically called a portfolio manager and their assistants, who invest the

funds assets in accordance with its investment objective and trade securities inrelation to any net inflows or outflows of investor capital (if applicable), as well asthe ongoing performance of investments appropriate for the fund. A mutual fundis advised by the investment adviser under an advisory contract which generallyis subject to renewal annually.

Mutual funds are subject to a special set of regulatory, accounting, and taxrules. In the U.S., unlike most other types of business entities, they are not taxedon their income as long as they distribute 90% of it to their shareholders and thefunds meet certain diversification requirements in the Internal Revenue Code.Also, the type of income they earn is often unchanged as it passes through to theshareholders. Mutual fund distributions of tax-free municipal bond income aretax-free to the shareholder. Taxable distributions can be either ordinary incomeor capital gains, depending on how the fund earned those distributions. Netlosses are not distributed or passed through to fund investors.

Types of mutual funds

Open-end fund, forms of organization, other funds

The term mutual fund is the common name for what is classified as anopen-end investment company by the SEC. Being open-ended means that, atthe end of every day, the fund continually issues new shares to investors buyinginto the fund and must stand ready to buy back shares from investors redeemingtheir shares at the then current net asset value per share.

Mutual funds must be structured as corporations or trusts, such asbusiness trusts, and any corporation or trust will be classified by the SEC as aninvestment company if it issues securities and primarily invests in non-government securities. An investment company will be classified by the SEC asan open-end investment company if they do not issue undivided interests inspecified securities (the defining characteristic of unit investment trusts or UITs)and if they issue redeemable securities. Registered investment companies thatare 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 itsshares 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 thesecondary market at a market-determined price (which is likely not equal to netasset value) such as on the New York or American Stock Exchange. Except for


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some special transactions, the fund cannot continue to grow in size by attractingmore investor capital like an open-end fund may.

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is oftenstructured as an open-end investment company. ETFs combine characteristics ofboth mutual funds and closed-end funds. ETFs are traded throughout the day ona stock exchange, just like closed-end funds, but at prices generallyapproximating the ETF's net asset value. Most ETFs are index funds and trackstock market indexes. Shares are issued or redeemed by institutional investors inlarge blocks (typically of 50,000). Most investors buy and sell shares throughbrokers in market transactions. Because the institutional investors normallypurchase and redeem in in kind transactions, ETFs are more efficient thantraditional mutual funds (which are continuously issuing and redeeming securitiesand, 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, forregulatory 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 mostcommon type of mutual fund. Equity funds hold 50 percent of all amountsinvested in mutual funds in the United States.Often equity funds focusinvestments on particular strategies and certain types of issuers.

Market Cap(capitalization)

Fund managers and other investment professionals have varyingdefinitions of mid-cap, and large-cap ranges. The following ranges are used byRussell Indexes:

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 stocksof companies that have the potential for large capital gains, and value funds,which concentrate on stocks that are undervalued. Value stocks have historicallyproduced higher returns; however, financial theory states this is compensation for


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their greater risk. Growth funds tend not to pay regular dividends. Income fundstend to be more conservative investments, with a focus on stocks that paydividends. A balanced fund may use a combination of strategies, typicallyincluding some level of investment in bonds, to stay more conservative when itcomes to risk, yet aim for some growth.

Index funds versus active management

An index fund maintains investments in companies that are part of majorstock (or bond) indexes, such as the S&P 500, while an actively managed fundattempts to outperform a relevant index through superior stock-pickingtechniques. The assets of an index fund are managed to closely approximate theperformance of a particular published index. Since the composition of an indexchanges infrequently, an index fund manager makes fewer trades, on average,than does an active fund manager. For this reason, index funds generally havelower 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, holdor sell individual holdings. Instead, a fairly simple computer model can identifywhatever changes are needed to bring the fund back into agreement with itstarget index.

Certain empirical evidence seems to illustrate that mutual funds do notbeat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500U.S. mutual funds under-performed the market in approximately half of the yearsbetween 1962 and 1992. An analysis of the equity funds returns of the 15 biggestasset management companies worldwide from 2004 to 2009 showed that about80% of the funds have returned below their respective benchmarks. Moreover,funds that performed well in the past are not able to beat the market again in thefuture (shown by Jensen, 1968; Grinblatt and Sheridan Titman, 1989).

Bond funds

Bond funds account for 18% of mutual fund assets. Types of bond fundsinclude term funds, which have a fixed set of time (short-, medium-, or long-term)before they mature. Municipal bond funds generally have lower returns, but havetax 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 bondsalso come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States.Money market funds generally entail the least risk, as well as lower rates ofreturn. Unlike certificates of deposit (CDs), open-end money fund shares are


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generally liquid and redeemable at "any time" (that is, normal business hoursduring 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 nota bank deposit, not insured and may lose value. Most money fund strive tomaintain 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 crisisaffecting 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 levelare often funds which an investor can invest in individually, though they may be'institutional' class shares that may not be within reach of an individualshareholder). 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 feecharged for asset allocation services which is presumably less demanding thanactive direct securities research and management. The fees charged at theunderlying fund level are a real cost or drag on performance but do not passthrough the FoF's income statement (statement of operations), but are usuallydisclosed in the fund's annual report, prospectus, or statement of additionalinformation. FoF's will often have a higher overall/combined expense ratio thanthat of a regular fund. The FoF should be evaluated on the combination of thefund-level expenses and underlying fund expenses, as these both reduce thereturn to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by thesame advisor), although some invest in unaffilated funds (those managed byother advisors) or both. The cost associated with investing in an unaffiliatedunderlying fund may be higher than investing in an affiliated underlying becauseof the investment management research involved in investing in fund advised bya different advisor. Recently, FoFs have been classified into those that areactively managed (in which the investment advisor reallocates frequently amongthe underlying funds in order to adjust to changing market conditions) and thosethat are passively managed (the investment advisor allocates assets on the basisof 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 theirown asset allocation model. Fund companies such as TIAA-CREF, AmericanCentury Investments, Vanguard, and Fidelity have also entered this market toprovide investors with these options and take the "guess work" out of selectingfunds. The allocation mixes usually vary by the time the investor would like toretire: 2020, 2030, 2050, etc. The more distant the target retirement date, themore aggressive the asset mix.


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may qualify to purchase "institutional" shares (and gain the benefit of theirtypically lower expense ratios) even though no members of the plan would qualifyindividually. As a result, each class will likely have different performance results.

A multi-class structure offers investors the ability to select a fee andexpense structure that is most appropriate for their investment goals (including

the length of time that they expect to remain invested in the fund).

Load and expenses

A front-end load or sales charge is a commission paid to a broker by amutual fund when shares are purchased, taken as a percentage of fundsinvested. The value of the investment is reduced by the amount of the load.Some funds have a deferred sales charge or back-end load. In this type of fundan investor pays no sales charge when purchasing shares, but will pay acommission out of the proceeds when shares are redeemed depending on howlong they are held. Another derivative structure is a level-load fund, in which nosales charge is paid when buying the fund, but a back-end load may be chargedif the shares purchased are sold within a year.

Load funds are sold through financial intermediaries such as brokers,financial planners, and other types of registered representatives who charge acommission for their services. Shares of front-end load funds are frequentlyeligible for breakpoints (i.e., a reduction in the commission paid) based on anumber of variables. These include other accounts in the same fund family heldby the investor or various family members, or committing to buy more of the fundwithin a set period of time in return for a lower commission "today".

It is possible to buy many mutual funds without paying a sales charge.

These are called no-load funds. In addition to being available from the fundcompany itself, no-load funds may be sold by some discount brokers for a flattransaction fee or even no fee at all. (This does not necessarily mean that thebroker is not compensated for the transaction; in such cases, the fund may paybrokers' commissions out of "distribution and marketing" expenses rather than aspecific sales charge. The buyer is therefore paying the fee indirectly through thefund's expenses deducted from profits.)

No-load funds include both index funds and actively managed funds. Thelargest mutual fund families selling no-load index funds are Vanguard andFidelity, though there are a number of smaller mutual fund families with no-load

funds as well. Expense ratios in some no-load index funds are less than 0.2%per year versus the typical actively managed fund's expense ratio of about 1.5%per year. Load funds usually have even higher expense ratios when the load isconsidered. The expense ratio is the anticipated annual cost to the investor ofholding shares of the fund. For example, on a $100,000 investment, an expenseratio of 0.2% means $200 of annual expense, while a 1.5% expense ratio wouldresult in $1,500 of annual expense. These expenses are before any salescommissions paid to purchase the mutual fund.


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Many fee-only financial advisors strongly suggest no-load funds such asindex funds. If the advisor is not of the fee-only type but is instead compensatedby commissions, the advisor may have a conflict of interest in selling high-commission load funds.

FOREIGN INSTITUTIONAL INVESTMENT

The term foreign institutional investment denotes all those investors orinvestment companies that are not located within the territory of the country inwhich they are investing.These are actually the outsiders in the financial marketsof the particular company. Foreign institutional investment is a common term inthe financial sector of India.

The type of institutions that are involved in the foreign institutionalinvestment are as follows:

Mutual Funds Hedge Funds Pension Funds Insurance Companies

The economies like India, which are growing very rapidly, are becominghot favorite investment destinations for the foreign institutional investors. Thesemarkets have the potential to grow in the near future . This is the prime reason

behind the growing interests of the foreign investors. The promise of rapid growthof the investable fund is tempting the investors and so they are coming in hugenumbers to these countries. The money, which is coming through the foreigninstitutional investment is referred as 'hot money' because the money can betaken out from the market at anytime by these investors.

The foreign investment market was not so developed in the past. But oncethe globalization took the whole world in its grip, the diversified global marketbecame united. Because of this the investment sector became very strong and atthe same time allowed the foreigners to enter the national financial market.

At the same time the developing countries understood the value of foreign

investment and allowed the foreign direct investment and foreign institutionalinvestment in their financial markets. Although the foreign direct investments arelong term investments but the foreign institutional investments are unpredictable.The Securities and Exchange Board of India looks after the foriegn institutionalinvestments in India. SEBI has imposed several rules and regulations on theseinvestments.


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Some important facts about the foreign institutional investment:

The number of registered foreign institutional investors on June 2007 hasreached 1042 from 813 in 2006.

US $6 billion has been invested in equities by these investors.

The total amount of these investments in the Indian financial market till June2007 has been estimated at US $53.06 billion. The foreign institutional investors are preferring the construction sector,

banking sector and the IT companies for the investments. Most active foreign institutional investors in India are HSBC, Merrill Lynch,

Citigroup.

ESSENCE OF SEBI GUIDELINES

The Securities and Exchange Board of India (SEBI) has brought insweeping changes for the mutual fund industry. The impact of which will be felton the investor in more ways than one.

1) First, for New Fund Offers (NFOs): They will only be open for 15 days. (ELSSfunds though will continue to stay open for up to 90 days) It will save investors

from a prolonged NFO period and being harangued by advisors andadvertisements. The motivation behind the rule seems to be simple if you caninvest anytime, why keep NFO period long?

2) NFOs can only be invested at the close of the NFO period. Earlier, Mutualfunds would keep an NFO open for 30 days, and the minute they received theirfirst cheque, the money would be directly invested in the market; creating askewed accounting for those that entered later since they get a fixed NFO price.


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3) Dividends can now only be paid out of actually realized gains. Impact: it willreduce both the quantum of dividends announced, and the measures used byMFs to garner investor money using dividend as a carrot to entice new investors.

4) Equity Mutual funds have been asked to play a more active role in corporategovernance of the companies they invest in. This will help mutual funds become

more active and not just that, they must reveal, in their annual reports from nextyear, what they did in each vote. SEBI has now made it mandatory for funds todisclose whether they voted for or against moves (suggested by companies inwhich they have invested) such as mergers, demergers, corporate governanceissues, appointment and removal of directors. MFs have to disclose it on theirwebsite as well as annual reports.

5) Equity Funds were allowed to charge 1% more as management fees if thefunds were no-load; but since SEBI has banned entry loads, this extra 1% hasalso been removed.

6) SEBI has also asked Mutual Funds to reveal all commission paid to its

sponsor or associate companies, employees and their relatives.7) Regarding the Fund-of-Fund (FOF) The market regulator has stated thatinformation documents that Asset Management Companies (AMCs) have beenentering into revenue sharing arrangements with offshore funds in respect ofinvestments made on behalf of Fund of Fund schemes create conflict of interest.Henceforth, AMCs shall not enter into any revenue sharing arrangement with theunderlying funds in any manner and shall not receive any revenue by whatevermeans/head from the underlying fund.

DELEGATION OF POWERS

1. Investigation SEBI has rights for investigation of any person orintermediary or firm, act or rules.

2. Ceasing power If any person or firm involve in illegal activity or brake therules of sebi, it may pass an order requiring such person to cease.

3 Consent order It means an order settling administrative or civil proceedingsbetween the regulator and a person (party) who may prima facie be found to

have brake the laws.

RECOMMENDATIONS

In the above background, following recommendations are proposed:


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A. Since SEBI is responsible for registration and regulation of venture capitalfunds, the need is to harmonise and consolidate multiple regulatoryrequirements within the framework of SEBI regulations to provide foruniform, hassle free, single window clearance with SEBI as a

nodal regulator.

B. In view of the (a) above, Government of India may consider repealing theGovernment of India MoF(DEA) Guidelines for Overseas VentureCapital Investment in India dated September 20, 1995.

C. The Foreign Venture Capital Investor (FVCI) should registered under theSEBI Regulations under the pattern of FIIs.

D. For SEBI registered VCF, requirement of separate rules under the IncomeTax Act should be dispensed with on the pattern of mutual funds.

Jitendra

[email protected]

securities and exchang board of india

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