Addressing the lack of an advisory ecosystem, which is one of the biggest challenges for the Indian markets with only a few hundred RIAs for 10 crore investors, SEBI in its latest consultation paper has proposed many changes that will make it much easier for people to become RIAs. If these proposed changes become final, it’ll go a long way toward increasing the number of individuals wanting to become advisors. Here are some of the key highlights from the consultation paper.
Relaxation in eligibility criteria for IAs and RAs
Minimum qualification
| Existing rules for IAs | Existing rules for RAs | Proposed regulatory changes for IAs and RAs |
|---|---|---|
| Professional qualification/ Post Graduate degree in specified field /CFA/ PG Program from NISM | Professional qualification/ Post Graduate degree in specified field | Professional qualification/ Post Graduate degree/CFA/ PG Program from NISM + Graduate in specified field |
| AND | OR | |
| 5+ years relevant experience for individual and principal officer of non individual IA | Graduate with relevant experience of 5+ years experience for individual and principal officer of non individual IA in specified field | No requirement of experience |
| 2+ years for others associated with investment advice | For employees: Graduate in any discipline | For employees and other people associated with investment advice: Graduate in any discipline |
Note: Specified field includes finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services or markets.
Certification, experience
| Existing rules for IAs | Existing rules for RIAs | Proposed regulatory changes for IAs and RAs |
|---|---|---|
| Certification from NISM or NISM accredited certificate from other organization | Certification from NISM or other certificate recognized by SEBI | Certification from NISM or NISM accredited certificate from other organization |
| Fresh certification to be obtained before expiry of existing certification | Fresh certification to be obtained before expiry of existing certification | IAs/RA shall be required to have base certifications (NISM-Series-XA and XB for IAs, and NISM-Series-XV for RAs) only initially at the time of registration |
| No requirement of acquiring base certifications again. | ||
| Only certifications related to incremental changes/ developments during the previous 3 years or as specified need to be obtained and re-obtained on expiry of previous certification. |
Net worth
| Existing rules for IAs | Existing rules for RIAs | Proposed regulatory changes for IAs and RAs |
|---|---|---|
| Individual: Min.₹5 lakh | Individual/partnership firm: Min. ₹1 lakh | No requirement of any net worth for IAs and RAs. |
| For non-individual IA: Min. ₹ 50 lakh | Body corporate/LLP: Min. ₹25 lakh | Instead, IAs and RAs to maintain a deposit lien marked to stock exchange recognized as IAASB/RAASB as specified by SEBI |
| The amount of deposit to be maintained by IAs/RAs: | ||
| Up to 150 clients: ₹ 1 lakh | ||
| 150 to 300 clients: ₹ 2 lakh | ||
| 300 to 1,000 clients: ₹ 5 lakhs | ||
| 1,000 and above clients: ₹ 10 lakhs |
Clarity in activities that can be undertaken by IAs - scope of investment advice
For clients availing financial planning services of IAs, IAs may provide financial planning on broad allocation of different asset classes including asset classes under financial sector regulators and other legally permitted asset classes such as real estate, gold, etc.
Allowing registration as both Investment Adviser and Research analyst:
Considering the overlapping of services to their clients by IAs/RAs, it is proposed that individuals or partnership firms may be allowed to register as both IA and RA provided that they shall comply with the rules/regulations/reporting requirements under each of these regulations separately.
Use of Artificial Intelligence (‘AI’) tools in IA and RA services
Considering that the investment advice/ research services provided by IA/RA based on AI tools would affect the investment decision of clients, the responsibility of data security, and compliance with the regulatory provisions governing investment advisory services/research services lies solely with the IA/ RA, irrespective of the scale and scenario of IA/ RA using AI tools.
Trading call providers - Clarity in the applicability of IA Regulations/RA Regulations
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If the trading call is provided after the risk profiling of the client and product suitability assessment, such trading calls are on a “one-to-one” basis and will come under the purview of IA Regulations.
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If the trading call is provided without any risk profiling of the client and product suitability assessment, such trading calls are on a “one to many” basis and will come under the purview of RA Regulations.
Flexibility to IAs to change the modes of charging fees to clients
Presently, IAs can charge fees under two modes, namely, (i) Assets under Advice (AUA) mode, which is subject to a limit of 2.5% of AUA per annum per family of client across all services offered by IA, and (ii) Fixed fee mode, which is subject to a limit of ₹1,25,000 per annum per family of client across all services offered by IA.
Presently, IA can charge fees from a client under any one mode, i.e., AUA mode or fixed fee mode on an annual basis. Change of mode can be made only once in a year.
In order to offer more flexibility in charging fees, it is proposed to allow IAs to change the fee mode for a client at any time, without restriction on the minimum period between two fee mode changes. The maximum fee that can be charged by the IA shall, however, not exceed higher of ₹1,25,000 per annum per family or 2.5 % of AUA per annum per family.
As already applicable, in the case of accredited investors, the limits and modes of fees payable to the IA are based on bilaterally negotiated contractual terms.
Note:
- To charge a fee under AUA mode, AUA shall mean the aggregate net asset value of securities under the purview of SEBI.
Accredited investor: According to SEBI, Any institution or business entity trading securities through private placement having a net worth of Rs 25 crore and Any individual with a liquid worth of Rs 5 crore with a total annual gross income of Rs 50 lakh is eligible to be called an Accredited investor
Registration as Part-time investment adviser/research analyst:
Who CAN be part-time IA/RAs?
Person is employed as a professor, teacher, etc. provided that his employer provides no objection certificate to take up the activity as part-time IA/RA.
Persons engaged in education-related business/activities etc.
Professionals such as an architect, lawyer, doctor etc
Who CANNOT be part-time IA/RAs?
A person providing advice/recommendations on assets such as gold, real estate, cryptocurrency etc.
Who HAS TO register as a part-time IA/RA?
If a CA for the purpose of tax planning/tax filing provides advice/recommendation on securities as an asset class, he is not required to get registered as a part-time IA/RA. However, if a CA is providing security-specific advice/recommendation to its client even though as part of tax planning/tax filing, he/she is required to seek registration as a part-time IA/RA.
If a person is engaged in education activity or is employed as a professor and as part of employment/business, is providing security-specific information/recommendation, he/she is required to seek registration as IA/RA.
Link to the full consultation paper:
