5.2 Role of SEBI and the Mutual Fund Regulations

What SEBI Actually Regulates

SEBI's mutual fund framework touches every stage of a scheme's life:

1. Registration — of the mutual fund, the AMC and the trustees, with prior approval for trustee appointments
2. Scheme structure — categorisation, permitted categories, and the rule that an AMC may generally offer only one scheme per category
3. Documents — the Scheme Information Document, Statement of Additional Information and Key Information Memorandum, filed with SEBI before launch
4. Investment restrictions — prudential limits on concentration by company, issuer and sector
5. Valuation — fair valuation principles and daily NAV computation
6. Expenses — the ceiling on what may be charged to a scheme
7. Disclosure — daily NAV, monthly portfolios, half-yearly and annual results, risk-o-meter, scheme performance
8. Advertising — a prescribed code governing how performance and risk may be presented
9. Enforcement — inspection, investigation, adjudication, monetary penalty and directions

Since 1 April 2026 this framework operates under the SEBI (Mutual Funds) Regulations, 2026, which replaced the 1996 Regulations. SEBI described the exercise as consolidation and simplification that retains the core principles and safeguards, with provisions on prudential investment limits and valuation reorganised for ready reference.

Investment Restrictions: The Prudential Limits

These exist so that no scheme's fate rests on one company, one borrower or one industry. They are the most examinable numbers in the unit.

Equity concentration

A scheme may not invest more than 10% of its NAV in the equity shares or equity-related instruments of any one company.

Defined exceptions apply where concentration is inherent to the mandate — index funds and exchange traded funds, which must replicate an index whatever its composition, and sectoral or thematic schemes within their stated theme, subject to the conditions applicable to those categories.

Single-issuer debt exposure — linked to credit rating

Debt exposure to a single issuer is capped by the credit rating of the paper, so that weaker credits attract tighter limits:

The extension of 2 percentage points requires the prior approval of both the Board of Trustees and the Board of Directors of the AMC. Note the requirement is both boards — a favourite distractor.

These limits do not apply to government securities and treasury bills, which carry sovereign credit and would otherwise be artificially constrained.

Sector exposure

A debt scheme may not hold more than 20% of its net assets in any single sector. Two additions are permitted on top of that limit, both within the financial services sector:

Overall investment in housing finance companies must still not exceed the 20% sector exposure limit. The 20% sector cap itself excludes bank certificates of deposit, tri-party repo on government securities or treasury bills, government securities and treasury bills, short-term deposits of scheduled commercial banks, and AAA-rated securities issued by public financial institutions and public sector banks.

Other restrictions

• No investment in unlisted or privately placed securities of associates or group companies of the sponsor beyond prescribed limits.
• Inter-scheme transfers are permitted only at prevailing market price for quoted instruments, on a spot basis, and only where the security is consistent with the receiving scheme's objective.
• Borrowing is permitted only to meet temporary liquidity needs for redemptions or income distribution, generally capped at 20% of net assets for up to six months. The 2026 Regulations streamlined this framework, including for equity-oriented index funds and ETFs with execution-related needs.
• No purchase of its own units by a scheme other than through the normal repurchase mechanism.

Disclosure Obligations

SEBI's disclosure regime is what makes the industry auditable by outsiders:

• Daily NAV published on the AMC website and AMFI's site
• Monthly portfolio disclosure of complete scheme holdings
• Half-yearly financial results and an annual report for each scheme
• Risk-o-meter disclosed monthly, with changes communicated to unitholders
• Scheme performance against benchmark, in prescribed formats
• Voting disclosure on investee company resolutions with rationale
• Commission disclosure to investors in account statements

Enforcement

Under the SEBI Act, 1992, SEBI may inspect books and records, investigate, summon persons and documents, pass directions including restraint from accessing the securities market, impose monetary penalties through adjudication, and cancel or suspend registration. Appeals lie to the Securities Appellate Tribunal (SAT) and from there to the Supreme Court on questions of law.

For a distributor the practical point is narrower but important: SEBI's writ runs to the AMC and the fund; distributor conduct is enforced primarily through the AMFI Code of Conduct and the ARN, but serious market misconduct remains within SEBI's reach under the general securities law.