To implement certain proposals suggested by the Securities and Exchange Board of India (“SEBI”) in its Consultation Paper on investment adviser (“IAs”) issued in January 2020, by way of an amendment regulation dated July 3, 2020 (“Amendment Regulations”) SEBI has amended the SEBI (IA) Regulations, 2013 (“IA Regulations”). The changes proposed under the Amendment Regulations would come into force in October 2020. Certain noteworthy aspects of the Amendment Regulations are provided below
a. Exemption from IA registration: SEBI has continued to retain all earlier categories of persons who could avail of exemption from being registered under the IA Regulations. This is a very reassuring step by SEBI which has been well received by industry participants.
b. Increased net-worth requirements: The minimum net worth requirement of body corporate IA has been raised from INR 25,00,000 to INR 50,00,000, and that of an individual IA has been increased from INR 1,00,000 to INR 5,00,000. All existing IAs have been provided a period of three years (i.e. upto October 1, 2023) to meet this requirement.
c. Revised Personnel requirements:
i. Principal officer: Every IA is now required to have a principal officer, who has been defined to mean the managing director or designated director or managing partner or executive chairman of the board or equivalent management body, and who is responsible for the overall function of the business and operations of a non-individual IA. The principal officer is also required to meet certain qualification and experience requirements prescribed under the Amendment Regulations by October 1, 2023. The principal officer is also required to meet the same certification requirements which a representative of an IA was required to meet earlier.
ii. Persons associated with investment advice: The previous requirement of every IA having a representative who was an employee or an agent of the IA rendering investment advice on behalf of that IA has been done away with. Under the Amendment Regulations, SEBI has introduced a much wider concept of “persons associated with investment advice”. “Persons associated with investment advice” are required to meet certain qualification, experience and certification requirements, and have been defined to include any member, partner, officer, director or employee or any sales staff of such investment adviser including any person occupying a similar status or performing a similar function irrespective of the nature of association with the investment adviser who is engaged in providing investment advisory services to the clients of the investment adviser. All client-facing persons such as sales staff, service relationship managers, client relationship managers, etc., by whatever name called are now deemed to be persons associated with investment advice.
d. Client level segregation of advisory and distribution activities: Under the earlier IA Regulations, there were no restrictions on the IA providing both, advisory and distribution services, either itself or at a group level, to the same client. Pursuant to the Amendment Regulations, SEBI has mandated that non-individual IAs shall have client level segregation at group level for investment advisory and distribution services. The same client cannot be offered both advisory and distribution services within the group of the non-individual entity. A client can either be an advisory client where no distributor consideration is received at the group level or distribution services client where no advisory fee is collected from the client at the group level. Non-individual IAs must maintain an arm’s length relationship between its activities as an investment adviser and distributor.
e. IAs permitted to provide implementation of advice or execution: IAs will now be permitted to provide implementation services to its advisory clients through direct schemes/products in the securities market. IAs have to ensure that no consideration including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received; directly or indirectly, at the IA’s group or family level. Nor are IAs permitted to charge any implementation fees from the client.
f. Fees: While the Amendment Regulations has provided for a separate regulation on the IA being entitled to charge fees from its client, no further details have been provided in this regard. We believe that SEBI would be issuing separate circular providing further details in this regard. The Consultation Paper issued in January 2020 had provided certain proposals on IAs charging fees on an annual basis either on fixed fees basis or fees linked to the assets under advice. In this regard, the term “assets under advice” has now been defined to mean “the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by investment adviser or concluded by the client directly or through other service providers.”
g. Submission of copy of audit report with SEBI: Pursuant to the Amendment Regulations, the yearly audit report relating to compliance with the IA Regulations will now have to be submitted with SEBI as directed by them.
Rushabh Maniar, Partner
Sonali Ladha, Associate