All you need to know about Regulations of Investment Advisors in India

In India, one must register with SEBI as a Registered Investment Adviser (RIA) to provide investment advice. Once registered, they must behave in a fiduciary manner toward their clients. Before 2013, there were no definitive rules governing investment advisers, therefore anyone could declare themselves to be one. In the interest of the investors, SEBI released the Investment Advisor Regulations, 2013 in response to the necessity for robust regulation. Let us find out some basic interrelated notions regarding SEBI’s Registered Investment Adviser (RIA).
Before we move on to discuss the Regulations of Investment Advisors in India, Let us find out what is Investment Advisor.

Short Glimpse

A person or organization that offers “investment advice” to another person in exchange for money is known as an investment advisor. Financial planners, financial advisors, investment advisors, portfolio managers, and tax savings advisors are just a few of the functions that investment advisors do. According to the SEBI (Investment Advisors) Regulations, 2013 (the “SEBI Regulation”), an investment advisor must register with SEBI to conduct advising activities. According to SEBI Regulation, no one may represent themselves or function as an investment adviser unless they have a certificate of registration from the SEBI.

No one may use the terms “Independent Financial Adviser,” “IFA,” “Wealth Adviser,” or any other name that is similar while engaging in the distribution of securities unless that person has registered as a Registered Investment Adviser (or “RIA”) with the SEBI. As a result, registration is required to engage in investment advisory activities.

Meaning of Investment Advisor

Any individual or organization that provides financial advice or does securities analysis in exchange for a fee is referred to as an investment advisor. Investment consultants offer advice to clients who are employed as professionals in the financial sector. Some people are exempt, including insurance agents, pension advisers, stock brokers, mutual fund distributors, fund managers, attorneys, and law firms. Customers that use an investment adviser’s services are known as clients.

According to the Regulation of 2013, an “investment adviser” is any person who, in exchange for payment, engages in the business of giving investment advice to clients or other people or groups of people. This definition also includes anyone who presents themselves as an investment adviser, regardless of what name they go by.
The term “investment advice” refers to guidance on making investments in, buying, selling, or otherwise transacting in securities or investment products, as well as guidance on building a portfolio of securities or investment products. Any advice supplied through a newspaper, magazine, or other electronic medium is not to be taken as investment advice, it is said.

The Securities and Exchange Board of India (SEBI), which was established by the Securities and Exchange Board of India Act, 1992, issues certificates of registration to individuals who wish to act as investment advisers. Actions under the Act of 1992 may be taken if it is discovered that someone is involved in offering investment advising services without registering with SEBI.

Requirements for Qualifications and Certification

A person must meet the following requirements to be considered:

• An advanced degree or professional certification in finance, accounting, business management, commerce, economics, capital markets, banking, insurance, or
• Any discipline-trained graduate with at least five years of expertise in financial product, security, fund, asset, or portfolio management advice.

He must be certified in financial planning, funds, assets, or portfolios by the 

• National Institute of Security Markets (NISM) or 
• Any other agency recognized by NISM, such as the Financial Planning Standards Board India (FPSB).

Simply said, a graduate from any subject or post-graduate in a field connected to finance who has five years of experience in the financial sector is eligible to apply to SEBI for registration as an investment adviser after passing the Level-1 and Level-2 NISM tests.
The conditions for registration, certification, capital adequacy, code of conduct, etc. are governed by the SEBI (Investment Advisers) Regulation, 2013 (“IA Regulations”), which was notified in January 2013.

Who must sign up to become an Investment Advisor?

Anyone involved in, or willing to engage in, a business that offers “investment advice” to anyone for consideration must register as an investment advisor. This includes individuals, firms, and groups of individuals. Financial planning is included in the definition of “investment advice,” which also includes advice on investment portfolios incorporating securities or investment products. Investment advice can be given orally, in writing, or by any other means of communication for the client’s benefit. With the caveat that investment advice supplied through widely accessible media like newspapers, periodicals, electronic broadcasts, or telecommunications will not be regarded as such for SEBI’s purposes.
However, investment advisers must abide by the pertinent rules of the SEBI (Research Analysts) Regulations, 2014 while making public appearances, giving recommendations, or providing an opinion regarding securities or public offers through the media.

However, the following group of people is not required to register with SEBI RIA:

• Insurance Brokers or Agents who have IRDAI Registration;
• PFRDA-registered Pension Advisors;
• Distributors of mutual funds who are AMFI-registered and can offer clients basic guidance incidentally;
• Any attorney, solicitor, or 
• Law office that offers its clients investing advice as a side business;
• Individuals who are members of the Institute of Company Secretaries of India (ICSI), Institute of Cost and Works Accountants of India (ICMAI), and Institute of Chartered Accountants of India (ICAI) and who can offer clients advice incidental to their services;
• Anyone who is a registered stockbroker, sub-broker, portfolio manager, or merchant banker;
• Anyone who is a registered stockbroker, sub-broker, portfolio manager, or merchant banker;
• Mutual fund plan fund manager;
• Anyone who solely offers foreign clients investment advice.

RIA-Related Regulatory Framework 

Two organizations deal with RIAs:

• The Securities and Exchange Board of India (‘SEBI’), which is the RIA’s regulatory authority; and
• BSE Administration and Supervision Limited (‘BASL’), is a supervisory agency tasked with overseeing the operations of RIAs.

SEBI establishes the registration terms, qualification, eligibility requirements, client fees, agreement with the customer, and implementation services. SEBI has been changing the rules for RIAs regularly in order to boost investor confidence and increase transparency in investment advising services. BASL, on the other hand, oversees the operations of RIAs in India.

The regulatory framework for RIAs in India is as follows:

• SEBI (Investment Advisors) Regulation 2013;
• SEBI circular dated December 27, 2019, on Measures to Strengthen the Conduct of Investment Advisors;
• SEBI circular on Investment Advisor Guidelines dated September 23, 2020;
• SEBI circular dated December 13th, 2021 on Publishing Investment Charter and Disclosure of Investor Complaints by Investment Advisor on their website / mobile applications;
• SEBI circular dated December 21, 2021, on Investment Advisory Services for Accredited Investors;
• Circulars in BASL.

Contracts between clients and RIA

To guarantee openness, RIAs must establish an agreement covering investment advisory services with every client. The SEBI circular of September 23, 2020, specifies the terms, guidelines, and conditions that must be incorporated in the Investment advisory agreement, but does not describe the format of the agreement.

RIA’s overall Responsibility

The general responsibilities of a Registered Investment Advisor are as follows:

• An RIA must act in a fiduciary capacity for its clients and report any conflicts of interest that emerge.
• An RIA shall not accept any remuneration, compensation, or another form of consideration from anybody other than the client being advised about the underlying products or securities for which advice is offered.
• An RIA must maintain a separation between its activity as an investment adviser and its other activities.
• An RIA must adhere to the Know Your Client procedure as established by the SEBI from time to time.
• An RIA shall not intentionally sell securities or investment products to or purchase securities or investment goods from a customer on its account.
• In the event of a change in control of the RIA, prior authorization from the SEBI is required.

Appointment of a Compliance Officer

An investment advisor that is a company or a partnership firm must designate a compliance officer who is responsible for monitoring the investment adviser’s compliance with the Act, regulations, notifications, guidelines, and instructions issued by the SEBI.

What is Compliance Audit?

According to Regulation 19(3) of the SEBI (Investment Advisor) Regulation, 2013 and the SEBI circular dated September 23, 2020, titled “Guidelines for Investment Advisers,” Investment Advisers must perform an annual compliance audit to guarantee compliance with SEBI regulations and circulars.

The audit must be completed within 6 months of the end of each fiscal year, i.e. by September 30th. Such a Compliance audit must be performed by the Practicing Company Secretary (PCS) or CA and reported to the ‘BASL’. Along with the audit report, RIAs must submit any adverse findings and actions taken to BASL within one month of the date of the compliance audit report, but no later than October 31st of each year.

RIAs that additionally provide distribution services should get an audit certificate showing compliance with the client-level segregation rules. The compliance audit will include this certificate.

Registration Process for Investment Advisor

Applications must be submitted in Form A as per the First Schedule of the Investment Adviser Regulations along with the required supporting documentation and application fees of Rs. 5,000 (payable by bank draught). On the SEBI website, the method is also detailed. Within a month, SEBI responds to the application.
For the convenience of legitimate entities, the application must be submitted to SEBI’s Head Office (HO), the relevant Regional Office, or the Local Office within the applicant’s jurisdiction. Once satisfied, SEBI will approve the application and issue a certificate of registration.

Three months before it expires, the certificate of registration must be renewed. It is valid for five years.

Investment Advisor Regulations in India: Body Corporate

The definition of “bodies corporate” in the rule is the same as that in the Companies Act, of 1956.

According to Section 2, a corporation incorporated outside of India is a “body corporate,” although it excludes- 

• Cooperative societies registered under any law governing cooperative societies and 
• Any other bodies corporate (not being a company as defined in this act).

A body corporate must apply to a specifically named division if it intends to add investment advisory services to its current business. However, if the body corporate intends to engage in purely advising activities, no specific division needs to be named. Any corporate entity may be recognized by the SEBI board to regulate investment advisors, and at the time of such recognition, the SEBI board may provide the recognized entity authority to manage and oversee investment advisers under the stated terms and conditions.

The Board may also stipulate that in such instances, the rules of this regulation shall apply and that no individual shall serve as an Investment Adviser unless such person is a member of a recognized body corporate with the necessary changes having been made.

Investment advisors who are corporations must have a minimum net worth of 25 lakh rupees. By net worth, we mean the whole value of paid-up capital plus free reserves less the total value of accrued losses. The body corporate registration or renewal charge is Rs. 5,000,000.

A compliance officer must be appointed by an investment advisor who is a body corporate or a Partnership Firm to oversee the investment adviser’s adherence to the Act.

Takeaway

Obtaining a SEBI RIA license has various advantages. On the other hand, because RIAs have the necessary qualifications, certification, and experience, investors receive high-quality services. Furthermore, RIAs do risk profiling and assess the suitability of investment advice by SEBI requirements, assisting investors in achieving their investment objectives. RIAs are required to work in the best interests of their clients.

As a result, they report all conflicts of interest as they emerge. Furthermore, to avoid conflicts of interest, the execution and investment advisory services are separated. As a result, there is more transparency during the financial counseling process. Given all of these facts and benefits, it is prudent to register with the SEBI to provide investment advisory services, and investors should only seek advice from SEBI-registered RIAs.

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