On 21 January, the Securities and Exchange Board of India (SEBI) notified the SEBI (Investment Advisers) Regulations, 2013 (IA Regulations). These regulations have been introduced with a view to regulate the work of investment advisers keeping in mind the rapidly growing Indian asset management and financial advisory industry.
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The IA Regulations require all persons providing investment advice to investors in return for consideration to register with SEBI. The term “investment adviser” has been defined as any person who is engaged in the business of providing investment advice to clients or other persons or group of persons for a consideration, and includes any person who holds themself out as an investment adviser by whatever name. “Investment advice” means advice relating to investing, purchasing or dealing with securities and advice on investment portfolios containing securities or investment products for the benefit of the client, including financial planning. Such advice may be written, oral or through other means.
Eligibility criteria for registration as an investment adviser: Registration criteria vary depending on the form of the adviser, i.e. whether an applicant is a body corporate, firm, limited liability partnership or an individual. Other factors include previous disciplinary history in the context of the securities market as well as any past refusal of registration by SEBI under any other regulation. Banks and non-banking financial companies are required to make additional disclosures.
Exemption from registration: Exempted persons include stockbrokers and sub-brokers, merchant bankers and portfolio managers already registered with SEBI and distributors registered with All India Mutual Fund, who are providing investment advice incidental to their primary activity. The list also includes fund managers of mutual funds or alternative investment funds or managers registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996, and intermediaries registered with SEBI, among others.
Responsibilities of investment advisers for risk mitigation: The IA Regulations mandate that investment advisers act in a fiduciary capacity towards their clients and disclose conflicts of interests as and when they arise. In addition, several provisions relate to new requirements for the placement of “Chinese walls” to prevent adverse impact on clients of advisers. The IA Regulations also prohibit investment advisers from receiving any consideration for services provided from any person other than the client being advised. Investment advisers also require prior approval from SEBI in case of change in control of the investment adviser.
Obligations and compliances: The IA Regulations outline an investment adviser’s obligations, including carrying out risk profiling for clients, maintaining records, and making relevant disclosures to enable clients to make informed decisions on whether to procure the services of an investment adviser.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
