SEBI (INVESTMENT ADVISERS) (AMENDMENT) REGULATIONS, 2020: IMPACT & ANALYSIS: M SRINIDHI

 

The Securities Exchange Board of India had introduced SEBI (IA) Regulations in the year 2013. The Board later proposed certain suggestions to the aforementioned regulations in January, 2020. The SEBI (IA) (Amendment) Regulations was therefore issued on 3^rd July, 2020. This is come into force in the month of October, 2020. This post will deal with the proposed changes in a condensed manner, and the implications of the same.

 

1. THE REFORMS UNDER THE AMENDED REGULATIONS:

 

A.    Exemption from Investor Advisers Regulations: The SEBI has retained all the categories of persons who can avail exemptions from being registered under IA Regulations.

B.    Differentiation of Advisory and Distribution Activities: This has been incorporated to eradicate the conflict of interest at the client level. The individual in this case has the option to register either as an Investment Adviser, or as a Distributor. This showcases that a separate divisions have been created to avoid conflict of interest between distribution and investment advisory functions at the base level.

C.    Eligibility Criteria for Investment Adviser: The criteria to register as an Investment Advisor here is threefold in nature. Firstly the eligibility has been enhanced. There should be a net – worth of Rs. 5 lakhs for individuals to register as an investment adviser. Additionally, the net worth should be 50 lakhs in the case of non – individuals.  Secondly, an Individual Investment Adviser or a principal advisor of a non- individual investment adviser should have professional expertise or a post graduate degree in the relevant subjects. Furthermore, the Investment Advisers are to have a minimum of 5 years’ experience. Lastly, for a non-individual adviser to register with SEBI, the number of clients of such a non- individual investor must exceed 150 in total.

D.    Requirement of Principal Officer: It has been laid down by SEBI that every Investment Adviser is required to have a principal officer. A principal officer is defined as a managing director/ partner, designated director or chairman of the Board of Directors or a managerial equivalent to the Board. The principal officer is responsible for the overall functioning, business and operations of a non- individual investment adviser. The eligibility criteria of the principal officer is same as the Investor Adviser and has been prescribed under SEBI (IA) (Amending) Regulations. The criteria is to be met by the 23^rd October, 2023.

E.    The Incorporation of “Persons Associated with Investment Advice”: The prerequisite under the SEBI (IA) Regulations which required the Investment Adviser to have a representative who is the employee or agent of the investment adviser has been removed. This has been replaced by the concept of ‘persons associated with advice’. This removes the cap established with respect to eligibility criteria of the aforementioned representative. ‘Persons associated to advice’ are defined to include any member, person, partner, officer, or employee (together with sales staff). It also includes any person who has been engaged providing investment advice to the clients of the IAs. This concept includes every client facing persons. These persons are deemed to be persons relating to, or associated with investment advice.

F.    Implementation Services: It is to be noted that Investment Advisers are allowed to provide for implementation services, and its execution by the virtue of direct schemes & products in the securities products. However, consideration cannot be received in this case either directly or indirectly.

G.    Agreement between Investor Adviser and Client: The Amendment has brought forward the provision of a mandatory agreement between the Investment Adviser and the Client. This is to ensure that there exists transparency and accountability in the matters of investment advisory functions.

H.   Fees: The fees shall be levied in the manner specified by SEBI in a separate circular. Although the Consultation Paper dated January, 2020 provided for certain recommendations for the fee structure of IAs. This included charging fees on an annual basis, on a fixed rate, or rates based on the linked assets. It is to be noted that no details have been provided for the same.

 

2. IMPACT OF THE AMENDED REGULATIONS:

 

A.    PROS:

●       The retaining provision with respect to the categories for exemption of IAs is inspirit of the 2013 Regulations thereby not deviating from the object of the Regulation.

●       The segregation on the foundational level between the advisory and distribution activities is would avoid conflicts and result in the ease of administration. It also provides for flexibility to duct both the businesses alongside. The client – level segregation is applicable for non – individuals and not individuals.

●       The comprehensive agreement between the investment adviser and the client has been made mandatory. This would result in effective functioning and communication between the parties involved.

●       The implementation of IAs would help clients in terms of implementation support. Additionally, the suggestions are to be non- commissionable in nature.

●       The language of the Regulation is also clear as it uses terms such as Wealth Adviser, Financial Adviser etc. which would avoid misrepresentation by individuals.

 

B.    CONS:

●       As the qualifications of IA has been increased in terms of exam repetition and achieving certifications. This has the possibility of dissuading individuals to enroll themselves as an IA.

●       The increase in the net worth of IAs has also increased. As this regulation will come into effect in the month of October 2020, the companies which are being newly registered will take hit when it comes to the aspect of compliance.

●       One of the main ground level challenges is the procurement & retaining of 150 clients by the IAs. This would dissuade the corporatization of companies.

●       The fees charged as per the amended regulations, is silent in nature.

 

3. CONCLUSION:

The amending regulation is a step in the right direction. It aims at dispute resolution, and provides for conceptual clarity that the 2013 Regulations lacked. Additionally, it is also reassuring in the sense that it does not deviate from the very object of the regulation. There are certain areas which needs to be eliminated or amended to ensure the protection of the interests of the IAs.

4. SOURCES:

 

1. CS Lalit Rajput, SEBI (Investors Advisers) (Amendment) Regulations, 2020, Legal Service India (Aug 3^rd. 2020), http://www.legalserviceindia.com/legal/article-3079-sebi-investment-advisers-amendment-regulations-2020.html.
2. Ashima Obhan & Bambi Bhalla, An Overview of the SEBI (Investors Advisers) (Amendment) Regulations, 2020, Obhan & Associates, https://www.obhanandassociates.com/blog/an-overview-of-the-sebi-investment-advisers-amendment-regulations-2020/.
3. Rushab Maniar & Sonali Ladha, Impact of SEBI (Investors Advisers) (Amendment) Regulations, 2020, AZB & Partners (Aug. 11^th, 2020), https://www.azbpartners.com/bank/impact-of-sebi-investment-advisers-amendment-regulations-2020/.
4. Suresh Sadagopan, Impact of changes in Investment Advisers regulations, Economic Times (Aug. 1^st, 2020), https://economictimes.indiatimes.com/wealth/save/impact-of-changes-in-investment-advisers-regulations/articleshow/77261696.cms.
5. CS Ali, Impact and Analysis of SEBI (Investors Advisers) (Amendment) Regulations, 2020, Tax Guru (Jul. 5^th, 2020), https://taxguru.in/sebi/impact-analysis-sebi-investment-advisers-amendment-regulations-2020.html#:~:text=Provided%20that%20existing%20investment%20advisers,have%20been%20increased%20to%20Rs.