On January 21 2013, the Securities and Exchange Board of India (SEBI) finally issued the (Investment Advisors) Regulations 2013 (Regulation). The Regulations seek to regulate the activity of 'investment advice'.
Given the times, any attempt to offer better protection to the individual investor is seen as laudatory. The definition of 'investment advice' discusses advice on investment products and 'financial planning'. The Regulation does exempt a number of intermediaries/intermediation activities from registration. Yet, the Regulation may be viewed by some as very wide. One interpretation is that they apply even to those advising or rendering consultation services to corporates regarding the hedging of various types of financial risks, and even the rendering of cash management services. Of course it could be said that this is not what the Regulator intends, or had in mind, but then nothing prevents the Regulations from being applied as they read.
The Regulation requires registration with SEBI as an investment advisor (IA). Registration is subject to the fulfillment of certain basic criteria such as minimum educational qualifications, and affiliation with the National Institute of Securities Market.
Obligation and responsibility
The Regulations impose various responsibilities on IAs pertaining to fiduciary responsibility towards clients, record keeping, suitability appropriateness, a code of conduct, disclosures of conflicts of interests, segregation of activities other than investment advisory, payment of commission, and so on. Most of these compliances are understandable and laudatory. Stock brokers, and merchant bankers (who are otherwise exempted from registration as IAs), are required to comply with certain provisions (largely the manner in which clients are to be boarded and investment advice is to be rendered).
While the main objective behind the Regulation is unquestionable, the drafting of certain key terms does create some unease. Also, the extension of certain compliances to intermediaries such as merchant bankers does add to this concern. This is because while stock brokers may deal with retail clients, merchant bankers don't. It may not be surprising if as a result of the Regulation, there is some shake up in the market and consolidation of players, if not disappearance of smaller players altogether.