SEBI Clarifies Key Aspects of Investment Advisers Regulations by way of Informal Guidance

Posted On Apr 29, 2021 By admin With Comments Off

SEBI Clarifies Key Aspects of Investment Advisers Regulations through Informal Guidance

The Securities and Exchange Board of India( “SEBI” ), through its interpretive symbol, questioned to the requirements of Paytm Money Limited( “Paytm”) under the SEBI( Informal Guidance) Scheme, 2003( “Informal Guidance Scheme” ), on April 09, 2021, has clarified that investment advisers( “IAs” ), registered under SEBI for the purposes of the SEBI( Investment Advisers) Regulations, 2013( “IA Regulations” ), is no longer able:( i) be reimbursed from the asset handling corporations for any expenses incurred for services rendered to their clients, even though the adviser may not be blaming any advisory or executing costs;( ii) strive electronic assent from purchasers prior to rendering any financing suggestion, instead of a signed asset advisory agreement; and( iii) designate a department head, “whos not” a managing director or nominated head or succeeding chairwoman or manager chief or any other equivalent management body of the IA, as its’ superintendent officer’.

SEBI’s Informal Guidance Scheme

Under the Informal Guidance Scheme, counseling may be sought from SEBI by, inter alia, intermediaries registered with SEBI by way of a no action letter or an interpretive character. An interpretive word involves a department of SEBI providing its interpretation of relevant laws in the context of any proposed transactions in protections or a particular factual slot. Notably, an interpretive symbol published under the Informal Guidance Scheme is not a decisive decision or determination of any question of law or actuality 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 many practical implications that arise due to the interpretation of applicable laws.

Clarifications sought by Paytm and SEBI’s view

Query 1

Whether Paytm may avail repayment of service related to out of pocket expenditures such as KYC, technology hosting, programme hosting, etc ., from resource conduct companies of mutual funds whose direct proposals it recommends to its buyers?

Applicable principle

As per regulation 22 A of the IA Regulations 😛 TAGEND

IAs may afford implementation services to their advisory clients, provided that , no consideration, including any fee or referral costs, whether embedded or incidental or otherwise, by whatever name called, is received, directly or indirectly, at the IA’s group level. IAs or their group entities is therefore not blame any implementation costs from their clients; and A client of the IA shall not be under any obligation to avail implementation services from the IA.

SEBI’s view

SEBI has clarified that considering the prohibition under extent( i) and place( ii) above, Paytm cannot avail refund of any quantity from the asset management companies whose direct strategies are being recommended to their advisory clients.

Query 2

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

Applicable constitution

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

SEBI’s view

SEBI has clarified that the IA Regulations and the Circular envisage that no asset opinion is advisable to made by an IA to any buyer unless agree is received on the terms and conditions prescribed thereunder. Moreover, 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 attempting electronic authorization from the customer is no longer able be sufficient compliance with the IA Regulations, spoke with the Circular.

Query 3

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

Applicable statute

As per regulation 2( 1 )( s) of the IA Regulations, the period’ superintendent officer’ shall necessitate the managing director, or nominated director, or managing partner or executive chairman of the board of directors or equivalent administration torso, who is responsible for the overall role of the business and operations of the non-individual IA.

SEBI’s view

SEBI shall specify the following points 😛 TAGEND

The IA Regulations necessary the front/ member of the board of directors of the corporate IA to be responsible for the functions and business operations of the IA. Further, in the context of the word’ equivalent management body’, the same is understood to mean equivalent management forms in cases of a corporate IA other than a company( such as a limited liability partnership ). In such instances, the correspond 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 labelled chairman or controlling chairperson or director 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 remarks

SEBI’s guidance is welcome as it clarifies some key aspects of the IA Regulations. The immediate wallop of this informal guidance would be that IAs would need to review if any overheads for implementation of advice are being recouped from the commodity makes for bona fide ancillary business interpreted on their behalf in connection with the asset 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 contained in the Indian Contract Act, 1872, or the Information Technology Act, 2000( “IT Act” ), which permit use of electronic signatures or Aadhaar based authentication of documents( except those documents which have been specifically provided under the firstly schedule of the IT Act, such as negotiable instruments and power of attorney ); 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, abundance and asset advisors, particularly web-based or portable application-based advisers is currently considering their internal handles to enter into signed asset advisory agreements with their clients exploiting legally permissible methods.

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