SEBI Clarifies Key Aspects of Investment Advisers Regulations through Informal Guidance

SEBI Clarifies Key Aspects of Investment Advisers Regulations through Informal Guidance

The Securities and Exchange Board of India( “SEBI” ), through its interpretive letter, questioned upon the request of Paytm Money Limited( “Paytm”) for the purposes of the SEBI( Informal Guidance) Scheme, 2003( “Informal Guidance Scheme” ), on April 09, 2021, has clarified that investment consultants( “IAs” ), registered with SEBI under the SEBI( Investment Advisers) Regulations, 2013( “IA Regulations” ), may not:( i) be reimbursed from the resource administration fellowships for any expenses incurred for services rendered to their clients, even though the adviser may not be blaming any advisory or execution rewards;( ii) endeavour electronic acquiesce from buyers prior to rendering any financing admonition, instead of a signed investment advisory agreement; and( iii) appoint a department head, “whos not” a managing board or labelled administrator or organizing chairman or director chair or any other equivalent management body of the IA, as its’ dean officer’.

SEBI’s Informal Guidance Scheme

Under the Informal Guidance Scheme, lead may be sought from SEBI by, inter alia, intermediaries registered with SEBI by way of a no act word or an interpretive symbol. An interpretive letter involves individual departments of SEBI providing its interpretation of relevant laws in the context of any proposed transactions in securities or a specific factual position. Notably, an interpretive letter published under the Informal Guidance Scheme is no longer a decisive decision or determination of any question of law or fact by SEBI and cannot be construed as an’ order’ under the provisions of the SEBI Act, 1992. Nevertheless, the Informal Guidance Scheme is an indication numerous practical connections that arise due to the interpretation of applicable laws.

Clarifications sought by Paytm and SEBI’s view

Query 1

Whether Paytm may avail refund of service related to out of pocket expenses such as KYC, technology hosting, programme hosting, etc ., from resource handling corporations of mutual funds whose direct intentions it is recommended its consumers?

Applicable principle

As per regulation 22 A of the IA Regulations 😛 TAGEND

IAs may provision implementation services to their advisory patrons, provided under , no circumstance, including any commissioning or referral costs, whether embedded or indirect or otherwise, by whatever name called, is received, either directly or indirectly, at the IA’s group level. IAs or their radical entities is therefore not accuse any implementation rewards from their clients; and A client of the IA shall not be under any obligation to avail implementation works from the IA.

SEBI’s view

SEBI has clarified that considering the prohibition under place( i) and place( ii) above, Paytm cannot avail repayment of any quantity from the resource control corporations whose direct programmes are being recommended to their advisory clients.

Query 2

Whether Paytm consider seeking electronic consent from its consumers containing all the necessary objects mentioned under the relevant SEBI circular?

Applicable regulation

Per regulation 19( 1 )( d) of the IA Regulations, predicted with spot 2( ii) of the SEBI circular dated September 23, 2020( “Circular” ), there has to be an investment advisory agreement between an IA and its consumers, including all the mandatory terms and conditions prescribed under the Circular, before any speculation admonition is rendered or any cost is charged for the services.

SEBI’s view

SEBI has clarified that the IA Regulations and the Circular envisage that no asset admonition should be interpreted by an IA to any buyer unless permit is received on the terms and conditions prescribed thereunder. Likewise, from the perspective of enforcement of the rights and obligations of the parties, SEBI has required IAs to compulsorily enter into an agreement with their clients, incorporating the terms prescribed under the Circular and therefore, purely searching electronic permit from the clients is no longer able be sufficient compliance with the IA Regulations, spoke with the Circular.

Query 3

Whether( i) all member states of a committee, appointed by the board of directors of Paytm to oversee advisory functions and operations, can be considered as’ handling body’; or( ii) the department head of the advisory business of Paytm, who is a member of the management advisory committee be appointed as a principal officer as defined under the IA Regulations?

Applicable ordinance

As per regulation 2( 1 )( s) of the IA Regulations, the period’ principal officer’ shall necessitate the managing director, or labelled chairman, or overseeing partner or exec chairman of the board of directors or equivalent management figure, which will provide for the overall capacity of the business and operations of the non-individual IA.

SEBI’s view

SEBI has clarified the following 😛 TAGEND

The IA Regulations involve the top/ member of the board of directors of the corporate IA to be responsible for the functions and business operations of the IA. Further, in different contexts of the expression’ equivalent conduct body’, the same is understood to mean equivalent management bodies in cases of a corporate IA other than a company( such as a limited liability partnership ). In such instances, the corresponding person eligible to be appointed as a principal officer would be the executive chairman of the managing body of the limited liability partnership.

Unless the member of any committee, constituted by the board of an IA, is also the managing director or marked superintendent or succeeding chairwoman or manager chair or any other equivalent management body of the IA, he shall not be eligible to be appointed as the principal officer of the IA.

Concluding mentions

SEBI’s guidance is welcome as it clarifies some the main aspects of the IA Regulations. The immediate impact of this informal guidance would be that IAs would need to review if any overheads for implementation of advice are being refunded from the commodity manufacturers for bona fide ancillary business interpreted on their behalf in connection with the investment advice.

Notably, neither the submissions of Paytm pertaining to seeking e-consent from their clients , nor the analysis of SEBI, taken into account( i) the provisions of the Indian Contract Act, 1872, or the Information Technology Act, 2000( “IT Act” ), which permit use of electronic signatures or Aadhaar located authentication of documents( except those documents which have been specifically stipulated in the firstly schedule of the IT Act, such as negotiable instruments and power of attorneys ); and( ii) the difficulties of executing contracts physically due to lockdown related restrictions imposed by the government to contain the spread of COVID-1 9. Therefore, fortune and asset advisors, particularly web-based or mobile application-based advisers is currently considering their internal operations to enter into signed asset advisory agreements with their clients consuming legally acceptable methods.

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