Securities and Exchange Board of India (“SEBI”) has introduced the SEBI (Investment Advisers) Regulations, 2013 (“Regulations”) to regulate obligations for investment advisers. The key highlights with respect to the Regulations are set out below:
Who is an Investment Adviser?
An investment adviser is a person rendering investment advice for consideration. The definition seems wide enough to include almost everyone who provides investment advice. However, it does not specify that consideration must be received from the person to whom the advice is being provided. This could, therefore, include those investment advisers who sell products on commission.
Those investment advisers who: (a) are either already regulated under another regulation; (b) advise experienced and seasoned investors; or (c) advise foreign investors, including non-resident Indians and persons of Indian origin are exempt from the provisions of the Regulations. Insurance brokers, pension advisers, agents registered with the Insurance Regulatory and Development Authority are also excluded provided they offer advice solely with respect to investment products. Similarly, professionals like lawyers, chartered accountants and company secretaries are excluded if they provide investment advice incidental to their respective professions.
Who is Covered?
With the definition being very wide and exceptions being very specific, it seems as though the Regulations cast a net around a specific group of advisers. This group mainly constitutes investment advisers who are often self-employed, work independently and who are not registered with or regulated by any other regulatory authority.
Registration requirements for Investment Advisers
The Regulations not only provide for detailed requirements with respect to qualifications but also require an applicant to clearly segregate its various businesses or services. Investment advisers are required to make adequate disclosures to investors with respect to their: (a) background; (b) consideration that they may be receiving from other sources with respect to the products or securities in question; (c) actual or potential conflicts of interest; (d) key features of the products; and (e) warnings and disclaimers in documents and other advertising material of the products. In addition to this investment advisers are required to complete a certain degree of risk profiling before recommending products or securities to investors.
Considering the nature of the registration requirements and the obligations and duties of the investment adviser post registration, it certainly seems like a tall order for the unorganised sector of investment advisers, to whom this seems to be directed.
Impact of the Regulations
Though SEBI’s attempt at organising and regulating a relatively unorganised sector is not misplaced, it seems very unlikely that the specific group of people who the Regulations target will actually be able to meet these requirements. This unorganised sector of investment advisers predominantly consists of individuals and they may find it hard to fulfill the qualification requirements like professional degree and net worth of INR 2,500,000 to even be registered, let alone being able to comply with the post registration requirements.