SEBI’s Proposal on New Asset Class

What’s in today’s article?

• Why in the News?
• About Securities and Exchange Board of India (SEBI)
• Why Was SEBI Formed?
• Powers of SEBI
• News Summary
• Conclusion

Why in the News?

• The Securities and Exchange Board of India (SEBI) has proposed a new asset class aimed at bridging the gap between mutual funds and portfolio management services (PMS).
• This aims to cater to investors with investible funds ranging from Rs 10 lakh to Rs 50 lakh.

About Securities and Exchange Board of India (SEBI)

• The SEBI is a statutory regulatory body established by the Government of India in 1992. It was given statutory powers through the SEBI Act, 1992.
• Objective: To regulate the securities market in India and protect the interests of investors in securities.

Why Was SEBI Formed?

• SEBI was established to keep a check on unfair and malpractices and protect the investors from such malpractices.
• The organization was created to meet the requirements of the following three groups:
  • Issuers: SEBI works toward providing a marketplace to the investors where they can efficiently and fairly raise their funds.
  • Intermediaries: SEBI works towards providing a professional and competitive market to the intermediaries
  • Investors: SEBI protects and supplies accurate information to investors.

Powers of SEBI

• Quasi-judicial powers:
  • In case of frauds and unethical practices pertaining to the securities market, SEBI has the power to pass judgments.
  • The said power facilitates to maintain transparency, accountability and fairness in the securities market.
• Quasi-executive powers:
  • SEBI has the power to examine the Book of Accounts and other vital documents to identify or gather evidence against violations.
  • If it finds one violating the regulations, the regulatory body has the power to impose rules, pass judgements and take legal actions against violators.
• Quasi-legislative powers:
  • To protect the interest of investors, the authoritative body has been entrusted with the power to formulate suitable rules and regulations.
  • Such rules tend to encompass the listing obligations, insider trading regulations and essential disclosure requirements.
  • The body formulates such rules and regulation to get rid of malpractices that are prevalent in the securities market.

News Summary

• The Securities and Exchange Board of India (SEBI) has proposed a new asset class designed to bridge the gap between mutual funds and portfolio management services (PMS).
• This new asset class targets investors with a higher risk appetite, offering potentially higher returns.
• Need for the New Asset Class:
  • SEBI identified a gap in the current investment spectrum.
  • Mutual funds cater to retail investors with varying risk appetites, while PMS and alternative investment funds (AIFs) serve sophisticated, high-net-worth investors.
  • The new asset class aims to provide an intermediate investment option that combines higher returns with higher risk.
• Investment Strategies:
  • The proposed asset class will include SEBI-approved strategies such as Long-Short Equity Funds and Inverse ETFs/Funds:
  • Long-Short Equity Funds: Involve taking both long and short positions in equity and equity-related instruments.
  • Inverse ETFs/Funds: Aim to generate returns that are negatively correlated with the underlying index.
• Global Availability:
  • Globally, these strategies are already available.
  • For instance, the US, regulated by the SEC, offers long-short equity funds with hedge fund-like strategies and the liquidity of mutual funds.
  • Similarly, Australia has various inverse ETF products that allow investors to hedge against market downturns or speculate on market declines.
• Investment Threshold:
  • The minimum investment requirement for this new asset class is Rs 10 lakh per investor.
  • This threshold is set to discourage retail investors while attracting those with an investible surplus ranging from Rs 10 lakh to Rs 50 lakh.
  • Investors can use options like Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP), and Systematic Transfer Plans (STP) for investing in this new asset class.
  • The total invested amount should not drop below Rs 10 lakh due to withdrawals or systematic transactions.
• Eligibility for Launch:
  • Mutual funds with an average AUM exceeding Rs 10,000 crore over three years or those managed by experienced CIOs and fund managers are eligible to launch this new asset class.
• Proposed Relaxations
  • Debt Securities: Limited to 10 percent of NAV, extendable to 12 percent with approval, and up to 20 percent with further approval.
  • Credit Risk-Based Limits: Ranges from 10 percent for AAA-rated securities to 6 percent for A and below, each extendable by 2 to 5 percent with approval.

Conclusion

• SEBI's proposed new asset class seeks to provide a regulated, flexible investment option for investors, addressing the gaps between mutual funds and PMS.
• By attracting sophisticated investors and curbing unauthorized investments, this initiative aims to enhance investment options and manage risks effectively.

Public comments on the proposal are invited by August 6, 2024.

Q1. What is the difference between Debt and Equity?

"Debt" involves borrowing money to be repaid, plus interest, while "equity" involves raising money by selling interests in the company. Essentially you will have to decide whether you want to pay back a loan or give shareholders stock in your company.

Q2. What is the basic difference between FPI and FDI?

Foreign Direct Investment (FDI) involves foreign investors directly investing in another nation's productive assets. Conversely, Foreign Portfolio Investment (FPI) entails investing in financial assets, like stocks and bonds, of entities situated in a different country.

Source: 'Sebi proposal on new asset class for high risk takers looks promising' | Money Control