Background
Investors in India have access to a wide range of investment products, including equities, mutual funds, Alternative Investment Funds (AIFs), and retirement and pension plans. These products vary in terms of returns, risks, and strategies. Maximizing the benefits of an investment often requires thorough research and understanding. However, not all investors possess the expertise to navigate the complexities of these products.
This is where investment advisors play a crucial role. An investment advisor—whether an individual or a corporate entity—provides guidance on suitable investment products based on an investor’s risk appetite and financial goals, in exchange for a fee.
India currently has 942 Investment Advisors (“IAs”) registered with the Securities and Exchange Board of India (SEBI). SEBI has noted a significant increase in the investor base, while the existing IAs are insufficient to meet the growing advisory needs. Additionally, there has been a rise in the number of unregistered investment advisory firms.
To address these concerns, SEBI on December 16, 2024 introduced significant amendments to the SEBI (Investment Advisor) Regulations, 2013 (“IA Regulations”). These amendments have sparked interest among aspiring investment advisors. This article aims to analyse the new changes and their impact on emerging investment advisory landscape in India.
The latest amendments have brought significant changes to the Investment Advisory landscape. However, this article will focus on three key areas long anticipated by the IA community – redefining the scope of investment advisory services, simplifying entry for aspiring investment advisors, and allowing the appointment of an Independent Professional instead of a Compliance Officer.
Redefining the Scope of Investment Advisory Services
It means an advice on investing in, buying, selling, or managing securities and investment products (emphasis supplied), as well as portfolio recommendations, delivered through any form of communication for the client’s benefit.
Previously, IAs were offering investment advice on various assets such as real estate, gold etc which are not regulated by financial sector regulators. Further, IAs were offering advice on estate planning and tax planning etc. These unregulated investment products may or may not carry disclosure of risks and are not subject to same level of legal scrutiny as regulated investment products. Hence, SEBI vide amendment on Dec 16, 2024, omitted the term ‘investment products’ from the definition of investment advice (See Regulation 2(1)(l) of IA Regulations).
SEBI’s regulations suggest that Investment Advisors (IAs) are restricted from advising on investment products not regulated by financial sector authorities. However, this is not entirely the case. SEBI has taken a balanced approach, allowing IAs to advise on unregulated products, provided they clearly disclose to the client that SEBI will not offer any recourse for grievances arising from such advice.
This approach fosters a welcoming environment. IAs with genuine expertise in unregulated products can confidently offer advice, assured that full disclosure protects both them and their clients. Clients, in turn, proceed with a clear understanding of the associated risks. On the other hand, IAs lacking the necessary expertise or knowledge in these unregulated investment products are likely to avoid offering advice, as they must disclose that these products fall outside regulatory oversight. The fear of reputational harm or potential regulatory violations for failing to disclose acts as a deterrent. This discourages reckless or profit-driven recommendations, promoting accountability and protecting investors.
Trading Calls Excluded from IA Regulations
Trading calls refer to non-delivery, intraday or ultra-short-term recommendations (excluding hedging) that are generalized and not tailored to individual investors or their financial goals. Under previous SEBI regulations, trading calls were a grey area. The Aug 2023, Association of Registered Investment Advisors Report (“ARIA Report”) shows that 95% of SEBI’s enforcement orders involved IAs providing such calls, likely due to uncertainty over whether trade calling qualified as investment advice. SEBI proposed including trading calls under IA Regulations if preceded by client risk profiling and product suitability checks. However, a new proviso to Regulation 2(1)(l) clarifies that trading calls do not constitute investment advice.
The deviation from the proposed amendment likely stemmed from demands by the IA community to exclude trade callers from IA Regulations and instead subject them to separate, stricter compliance norms. Including trade callers under IA regulations would have tightened compliance for all IAs, potentially raising barriers for new entrants.
Easing Entry norms for Investment Advisors
SEBI has eased the entry norms by the latest amendment, which can be categorized under four subheads namely: Relaxation of experience criteria, Shifting from net worth to deposit criteria, introduction of part time investment advisor, and tweaking qualification norms.
- Relaxation of Experience Criteria
When IA Regulations were conceptualised, SEBI deliberated to introduce an experience criteria of at least ten years in activities relating to advice in financial products, however the final Regulations introduced a criteria of at least five years. SEBI via the amendment has omitted Regulation 7(1)(b) that stipulated five-year experience criteria.
- Shifting from Net Worth to Deposit Criteria
Originally, SEBI had introduced capital adequacy requirement (networth) of INR 25 lakhs for IAs who are body corporate and INR 1 lakhs for individual IAs. In 2020, SEBI amended IA Regulations and increased the networth requirements to INR 50 lakhs for body corporates and INR 10 lakhs for individuals. SEBI has now parted ways with networth requirements and instead added a requirement to maintain a deposit lien with stock exchanges. The amount of deposit will depend upon number of clients maintained by IAs.
- Introduction of Part Time Investment Advisor
SEBI was deliberating upon a proposal to allow individuals or partnership firms who are engaged in the business not related to securities to be allowed to seek registration as IA. Now an applicant is eligible for registration as a part-time IA if they are involved in activities, business, or employment that is allowed by any financial sector regulator or by statutory self-regulatory organizations like the Institute of Chartered Accountants of India (ICAI).
- Qualification Norms Tweaked
Previously, applicants needed a post-graduate degree/diploma in finance or related fields to register as IAs. The amendment now allows graduates in these fields to apply. Earlier, IAs had to obtain and renew NISM Series XA and XB certifications every three years. Now, certification is required only at registration and later if there are significant regulatory changes in the past three years.
These four amendments will be a game changer. The removal of five-year experience along with net worth requirement is a progressive step, recognizing that every expert must start somewhere. The earlier criterion often hindered skilled and qualified individuals from entering the field, despite their potential to contribute meaningfully. Since IAs operate on a fee model, charging for advisory services rather than managing client funds or securities, maintaining a minimum net worth was a barrier. An individual can be skilled and knowledgeable enough to provide advice without needing to meet a steep net worth requirement.
Appointment of Independent Professional instead of a Compliance Officer
Non-individual IAs are required to appoint a compliance officer responsible for monitoring compliance with the SEBI Act, 1992, and related regulations, guidelines, and instructions. The appointment of a full-time compliance officer is costly which was noted by SEBI. In the FY 2023-24 budget speech, the government highlighted reducing compliance costs for regulated entities. In light of this, the latest amendment permits non-individual IAs to appoint independent professionals such as CA, CS, or CMA as compliance officers instead of a full-time compliance officer.
A non-individual IA is supposed to appoint a Principal officer who is responsible for overseeing overall functioning of the IA, including compliance. So having an independent professional in place of a full-time compliance officer would not affect compliance oversight.
Impact on Investment Advisory Landscape
Registration as an IA benefit both clients and advisors, with SEBI’s approval serving as a reliable indicator for clients to seek professional investment advice. From January 2013 to June 2023, SEBI issued 78 orders against IAs, 56 of which targeted unregistered advisors, according to media reports and the ARIA Report. These figures reflect only reported cases, suggesting that many unregistered advisors may continue operating undetected, especially if their advice benefits clients. However, when advice fails, clients are more likely to report it as fraud. Registration protects IAs, provided they adhere to IA regulations. Easing entry norms can help increase registered IAs while curbing the menace of increasing unregistered IAs.
Conclusion
SEBI’s recent amendments to the IA Regulations mark a significant step toward fostering growth in the investment advisory sector. By redefining the scope of advisory services, simplifying entry requirements, and introducing cost-effective compliance measures, SEBI has created an environment that encourages aspiring advisors while upholding investor protection. These changes strike a thoughtful balance between regulatory oversight and accessibility, paving the way for a more dynamic, professional, and ethical investment advisory ecosystem.