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Changing trends after enforcement of SEBI (Investment Advisers) Regulations, 2013

The capital market in India is extensively large and comprises of commercial banks, credit guarantee corporations and insurance companies amongst various other businesses. A very significant entity of the Indian capital market, yet occupying the smallest fraction in it is known as the Investment Adviser. An Investment Adviser means a person who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons.

Probably, for the reason that it factors for just 1% of the capital market in India, there never existed a regulatory mechanism to standardize the practices of the Investment Advisory market until the year 2013, when the Securities and Exchange Board of India (SEBI) made the regulations namely SEBI (Investment Advisers) Regulations, 2013 in exercise of the powers conferred by sub-section (1) of Section 30 read with Clause (b) of sub-section (2) of Section 11 of the SEBI Act, 1992.

With the coming into force of the IA Regulations, 2013, it became mandatory that each person acting as an Investment Adviser or holding itself as an Investment Adviser shall obtain a certificate of registration from SEBI by applying under Section 3 of the regulations.

However, upon fulfillment of conditions as mentioned in the IA Regulations, 2013, certain persons were exempted from the requirement of seeking registration. Nevertheless, it was made necessary that every other person who is not exempted ensures that it is registered under the IA Regulations, 2013.

Various general obligations and responsibilities are now cast on the Investment Advisers, such as one of acting in a fiduciary capacity towards its clients and disclosing all conflicts of interests as and when they arise, maintaining an arms-length relationship between its activities as an investment adviser and other activities, not receiving any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, following the Know Your Client procedures as specified by the board from time to time, etc.

It is also made important that an Investment Adviser now provides advice to the client based on the risk analysis / profiling of the client carried out by the investment adviser itself using a specific questionnaire, the guidelines for which are prescribed by the 2013 Regulations itself.

Risk profiling helps both the Investment Adviser and the customer to understand the latter’s capacity for absorbing loss and identifying whether a client is unwilling or unable to accept the risk of loss of capital. Therefore, the Investment Adviser is aware of the ground based on which, an advice can be extended to its customer and the customer is aware of the investment it can make. 

Not only this, the customers now have a grievance redressal mechanism guided by the regulations which necessitate the investment adviser to redress client grievances promptly. An investment adviser is now required to have an adequate procedure for expeditious grievance redressal of its customers.

This mechanism gives protection to the clients on one hand and imposes more responsibility on the Investment Adviser, both precautionary before giving the advice and curative, to remedy any default due to the Investment Adviser’s act or omission.

Effective the IA regulations, various benefits such as the above have been observed. The challenge for SEBI now is to bring all the Investment Advisers operating in India under the purview of these regulations. A prevalent problem is identification of unregistered Investment Advisers across India and the inability of a single board to keep a check on all the IA entities.

Even after six (06) years past the enforcement of these regulations, more than 50% of the IAs in the Indian capital market remain unregistered. Another challenge which is being seen is the ground issues faced by the registered IA entities to make themselves compliant with the regulations and the check-mechanism of SEBI on the same. Nevertheless, it is seen from prevailing circumstances that SEBI is taking one step at a time to make the entire Investment Advisory industry compliant with the 2013 regulations.

Written By: Jasleen Kaur
[email protected], mobile: +918884557587

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