In a Gazette Notification dated 3rd July, 2020 the Securities and Exchange Board of India (“SEBI”) has issued the Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020 (“Amendment Regulations”) in order to further amend the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“Principal Regulations”).
The Amendment Regulations have become effective on 3rd July i.e. on the date of its publication in the Official Gazette.
Further, in a Press Release dated 3rd July, 2020, SEBI has notified the amendments which intend to strengthen the regulatory framework for investment advisers.
For a detailed analysis, please refer to the table below:
| Principal Regulations | Amendment Regulations | Implications |
| Regulation 7:
Qualification and certification requirement-
(1) An individual investment adviser or a principal officer of a non-individual investment adviser registered as an investment adviser under these regulations, shall have the following minimum qualification, at all times – (a) A professional qualification or post-graduate degree or post graduate diploma (minimum two years in duration) in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association or a CFA Charter from the CFA Institute; (b) An experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management; (c) Persons associated with investment advice shall meet the following minimum qualifications, at all times – (i) a professional qualification as provided in clause (a) of sub-regulation (1) of regulation 7; and (ii) an experience of at least two years in activities relating to advice in financial products or securities or fund or asset or portfolio management: Provided that investment advisers registered under these regulations as on the date of commencement of these regulations shall ensure that the individual investment adviser or principal officer of a non-individual investment adviser registered under these regulations and persons associated with investment advice comply with such qualification and experience requirements within three years: Provided further that the requirements at clauses (a) and (b) shall not apply to such existing individual investment advisers as may be specified by the Board.
(2) An individual investment adviser or principal officer of a non-individual investment adviser, registered under these regulations and persons associated with investment advice shall have, at all times a certification on financial planning or fund or asset or portfolio management or investment advisory services – (a) from NISM; or (b) from any other organization or institution including Financial Planning Standards Board of India or any recognized stock exchange in India provided such certification is accredited by NISM: Provided that fresh certification must be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements:
Provided further that fresh certification before expiry of the validity of the existing certification shall not be obtained through a CPE program. |
Regulation 7:
Qualification and certification requirement-
(1) An individual registered as an investment adviser under these regulations and partners and representatives of an investment adviser registered under these regulations offering investment advice shall have the following minimum qualifications, at all times: (a) A professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association; or (b) A graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.
(2) An individual registered as an investment adviser and partners and representatives of investment advisers registered under these regulations offering investment advice shall have, at all times, a certification on financial planning or fund or asset or portfolio management or investment advisory services: (a) from NISM; or (b) from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM.:
Provided that the existing investment advisers seeking registration under these regulations shall ensure that their partners and representatives obtain such certification within two years from the date of commencement of these regulations: Provided further that fresh certification must be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements. |
The minimum qualifications of Representatives of an investment adviser registered under these regulations offering investment advice have been entirely substituted with the present Amendment.
Now, the minimum qualification of an individual investment adviser or a principal officer of a non-individual investment adviser registered as an investment adviser under these regulations have been prescribed.
An experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management is now prescribed.
Further, minimum qualifications have also been prescribed for persons associated with investment advice.
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| Regulation 8-
Capital adequacy:
(1) Investment advisers who are non-individuals shall have a net worth of not less than fifty lakh rupees. Explanation. — For the purposes of this regulation, “networth” means the aggregate value of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses, deferred expenditure not written off, including miscellaneous expenses not written off, and networth requirement for other services offered by the advisers in accordance with the applicable rules and regulations. (2) Investment advisers who are individuals shall have net tangible assets of value not less than five lakh rupees: Provided that existing investment advisers shall comply with the networth requirement within three years from the date of commencement of the SEBI (Investment Advisers) (Amendment) Regulations, 2020. |
Regulation 8:
Networth-
(1) Investment advisers which are body corporate shall have a net worth of not less than twenty five lakh rupees. Explanation.─ For the purposes of this regulation, “networth” means the aggregate value of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses, deferred expenditure not written off, including miscellaneous expenses not written off, and capital adequacy requirement for other services offered by the advisers in accordance with the applicable rules and regulations.
(2) Investment advisers who are individuals or partnership firms shall have net tangible assets of value not less than rupees one lakh: Provided that existing investment advisers shall comply with the capital adequacy requirement within one year from the date of commencement of these regulations. |
With the amendment coming into force, the minimum net worth of Investment advisers who are non-individuals must be fifty lakh rupees.
[The Amendment Regulations define “non-individual” as a body corporate including a limited liability partnership and a partnership firm;]
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| Regulation 13- Conditions of certificate.
(…)
d. individuals registered as investment advisers shall use the term ‘investment adviser’ in all their correspondences with their clients;
e. individuals registered as investment advisers whose number of clients exceed one hundred and fifty in total, shall apply for registration as non-individual investment adviser within such time as may be specified by the Board |
Regulation 13- Conditions of certificate.
(…)
d. individuals registered as investment advisers shall use the term ‘investment adviser’ in all their correspondences with their clients |
With a new insertion in Regulation 13 which deals with the conditions under which certificate is granted , it is stated that incase the number of clients for individuals registered as investment advisers exceeds 150 in total, the individual investment advisor has to apply for registration within such time as SEBI prescribes. |
| Regulation 22- Client level segregation of advisory and distribution activities:
(1) An individual investment adviser shall not provide distribution services.
(2) The family of an individual investment adviser shall not provide distribution services to the client advised by the individual investment adviser and no individual investment adviser shall provide advice to a client who is receiving distribution services from other family members.
(3) A non-individual investment adviser shall have client level segregation at group level for investment advisory and distribution services.
Explanation. — (i) The same client cannot be offered both advisory and distribution services within the group of the non-individual entity. (ii) 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. (iii) ‘Group’ for this purpose shall mean an entity which is a holding, subsidiary, associate, subsidiary of a holding company to which it is also a subsidiary or an investing company or the venturer of the company as per the provisions of Companies Act, 2013 for non-individual investment adviser which is a company under the said Act and in any other case, an entity which has a controlling interest or is subject to the controlling interest of a non-individual investment adviser.
(4) Non-individual investment adviser shall maintain an arm’s length relationship between its activities as investment adviser and distributor by providing advisory services through a separately identifiable department or division.
(5) Compliance and monitoring process for client segregation at group or family level shall be in accordance with the guidelines specified by the Board
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Regulation 22- Segregation of execution services:
Investment advisers which are banks, NBFCs and body corporate providing distribution or execution services to their clients shall keep their investment advisory services segregated from such activities: Provided that such distribution or execution services can only be offered subject to the following: (a) The client shall not be under any obligation to avail the distribution or execution services offered by the investment adviser. (b) The investment adviser shall maintain arms length relationship between its activities as investment adviser and distribution or execution services. (c) All fees and charges paid to distribution or execution service providers by the client shall be paid directly to the service providers and not through the investment adviser. |
With the entire substitution of the provision relating to segregation of execution services, the following changes are being introduced by the Amendment:
Segregation of Advisory & Distribution Activities at client level to avoid conflict of interest. An individual will have the option to register as an Investment Adviser or provide distribution services as a distributor. A non-individual investment adviser will have client level segregation at group level for investment advisory and distribution services and maintain an arm’s length relationship between its activities by providing advisory services through a separately identifiable department or division.
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2. New Insertions:
i. The Amendment Regulations insert a new provision, Regulation 15A which states that Investment Adviser will be entitled to charge fees for providing investment advice from a client in the manner as specified by the Board.
ii. The Amendment Regulations further insert a new provision which deals with “implementation of advice or execution” which states that the Investment Advisers are allowed to provide implementation services (Execution) through direct schemes/ products in the securities market. However, no consideration can be received directly or indirectly, at investment adviser’s group or family level for these services
3. The Amendment Regulations further make amendments in “Form A in First Schedule” of the Principal Regulations which deal with the “Application for Grant of Certificate of Registration/Renewal as investment adviser”
Background:
SEBI had issued a Consultation Paper, in January 2020, on Review of Regulatory Framework for Investment Advisers and sought comments from the public on the proposals. After considering the public comments received, the SEBI Board had approved the proposals on regulatory changes including amendments to SEBI (Investment Advisers) Regulations, 2013. To give effect to these proposals the Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020 have been notified.
Source: Securities and Exchange Board of India
Source: Securities and Exchange Board of India
