There is good news for NRI investors who stand to receive less biased advice after the Securities and Investment Board of India (Sebi) directed firms to segregate advisory and distribution activities to avoid conflicts of interest.
The change will come into effect from 30 September 2020.
It means that individuals working in the industry will have the option to register as an investment adviser or provide services as a distributor.
A non-individual investment adviser shall have client level segregation at a 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, said the Sebi notification.
The changes do not affect investment advisers in the UAE serving NRI clients, as they are not directly involved in the Indian market, except for facilitating online securities trading and mutual fund investments.
Investors stand to benefit as they will not be charged separately for advice and securities trading commission.
The segregation will obviate the need to depend on a distributor to buy securities.
“Investment advisers tend to push those products that get them more brokerage. As long as they don’t distribute a product, they will give impartial advice, keeping in mind the interest of the investors. This will facilitate to reach the right products to the customers,” said Benoy Sasi, international lawyer at DIFC Courts.
“Usually the registered investment advisers charge their clients directly instead of indirect fees for selling anyone’s products. This eventually leads to unbiased advice as the source of income for the adviser is not dependent on any asset management company,” said Khalid Abu Zaher, financial and regulatory expert at Al Khabir Accounts Records.
The fee charged by the investment adviser for providing investment advice will be as specified by the regulator.
Net worth requirement
At present, individuals are required to have a net worth of INR100,000 ($1,326; £1,056; €1,163) to register as an investment adviser, while the same for body corporate or non individuals is at least INR2.5m.
The amended provisions have increased this to INR500,000 and INR5m, respectively.
To ensure greater transparency with reference to advisory activities, the amendments call for a mandatory agreement to be entered into by the IA and the client.
Investment advisers are allowed to provide implementation services (execution) through direct schemes or 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.
Qualification for advisers
The eligibility criteria and qualifications have also been amended.
Individual investment advisers or a principal officer of a non-individual investment advisers need to have enhanced professional or post-graduate qualification in relevant subjects and five years of relevant experience.
However, existing individual investment advisers have been grandfathered from complying with the enhanced qualification and experience requirement.
Those registered as investment advisers whose number of clients exceeds 150, will have to apply for registration with Sebi as non-individual investment adviser.
The regulator had floated a consultation paper for a review of the regulatory framework for investment advisers and sought comments from the public on the proposals.
After considering the public feedback, the Sebi board approved the proposals on regulatory changes including amendments to Sebi (Investment Advisers) Regulations, 2013.