top of page

SEBI Ups the Game: New framework for Investment Advisers and Research Analysts

[Mr. Abhishek Raj & Ms. Srishti Solanki are 4th Year B.A.,L.L.B. (Hons) students at the West Bengal National University of Juridical Sciences, Kolkata]

 

The Securities and Exchange Control Board of India in its recent endeavour has come up with a comprehensive framework for better regulation of Research Analysts (RAs) and Investment Advisers (IAs) in India. On May 02, 2024 the Securities and Exchanges Board of India (SEBI) released a Framework for administration and supervision of Research Analysts and Investment Advisers. This regulation seeks to designate a recognized stock exchange as a common administrative and supervisory body for both RAs & IAs and will be effective from July 25, 2024. This will replace the BASL, a wholly owned subsidiary of BSE which was designated as Investment Advisers Administrative & Supervisory Body (IAASB) for IAs for the period of 3 years in June, 2021. These changes came after deliberate discussions, with the objectives of streamlining the oversight processes, promoting ease of doing business, efficiency to regulatory standards, and to protect investors in  securities market. SEBI observed that there is large number of emergence of RAs and/or IAs in India and the whole ecosystem is undergoing significant evolution. For instance, number of RAs has risen from mere 27 in 2015 to 1176 as of February, 2024. The latest framework is also seen as a countermeasure amidst flux of unregistered financial influencers (finfluencers)[1] giving out unsolicited/misleading advice on numerous investment aspects in India.


SEBI has been extremely wary of unsolicited financial advises floating in the market. In furtherance, SEBI keeps on issuing Warning Letter against individuals involved in providing investment advisory related services in securities market without being registered with SEBI either as Research Analyst (RA) or Investment Adviser (IA). Such investment advisory related activities are in violation of SEBI Act, 1992, SEBI Regulations, Rules and Circulars made thereunder.  

 

This post aims at understanding the new framework released for supervision and administration of RAs & IAs. Firstly, the piece will delve into intricacies of the proposed regulatory framework. Subsequently, it will assess the impact of the framework on RAs & IAs. Conclusively, an analytical overview of the framework will be outlined.


Regulatory Framework


As per the Regulation 38A of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, a recognised stock exchange  will be empowered to undertake administration and supervision activities over RAs & IAs in India subject to terms and conditions specified by SEBI. Thereby, Research Analyst Administration and Supervisory Body (RAASB) shall be set up for Research Analysts and Investment Adviser Administration and Supervisory Body (IAASB) for Investment Advisers. For a stock exchange to be designated as RAASB/IAASB under this framework, it has to have existed for a minimum of 15 years. The net worth of such recognised stock exchange must be at least INR 200 crores. Further, such exchange should have nationwide terminals. In order to better meet the objective of the framework, there has to be an Online Dispute Resolution Mechanism for investor grievance redressal. Another, very important criteria are to have Investor Service Centres (ISCs) in at least 20 cities. 


In order to streamline the setting up of these designated supervisory bodies, the framework  provides for inclusion of role and responsibilities in the Memorandum of Association, Articles of Association and the bye-laws of such stock exchange. Additionally, the designated body is required to maintain proper office space and manpower to carry out their responsibilities in an effective manner. Further, SEBI mandates RAASB and IAASB to maintain databases containing information of  RAs & IAs and share it duly with SEBI.


Roles and responsibilities of such stock exchange as RAASB and IAASB will be to ensure completeness of documents and information submitted to SEBI by RAs & IAs. Further, it will be responsible for scrutinizing the advertisements of RAs & IAs as per the Advertisement Code issued by SEBI. For better monitoring, such stock exchange is also tasked to obtain Annual Compliance Audit Report and other ad-hoc reports from both RAs & IAs along with power to collect prescribed fees and perform related administrative activities.


Moreover, in order to oversee the activities of administration and supervision, the framework requires for constitution of an internal committee with majority of the committee members being Public Interest Director, not more than two key management personnel along with industry representatives. For better efficiency and smooth functioning of the system, the framework provides that RAASB and IAASB shall be one and the same stock exchange. In case of multiplicity, where individuals are getting registered as both RAs & IAs, there will be a single clearance window for documentations.


Implications on  RAs & IAs


Previously, only IAs were required to register with the IAASB to get licence from SEBI. However, under the new framework, applicants seeking registration as either RAs or IAs must first mandatorily enlist with the RAASB or IAASB, respectively, as per clause (xi) of regulation 6 of the Research Analysts Regulations, 2014 and clause (n) of regulation 6 of the Investment Advisers Regulations, 2013.


There is also growing concerns over unauthorised practices being employed by registered advisers. For instance, 17 out of 22 complaints received against registered investment advisers pertained to trading call practices, which is not allowed by SEBI. As the number of RAs & IAs continues to surge across the nation, the prevalence of these unauthorized practices may escalate exponentially. To address this issue and all such unauthorised practices even of registered RAs & IAs, the exchange is given wide power of administration and supervision, including inspection. The exchange also holds the authority to impose penalties and issue warning/caution letters. Further, to ensure smooth transition and promote ease of doing business, the framework has done away with any additional requirement to get enlisted with the newly designated body for the current RAs/IAs/applicants and enlisted all the existing registered RAs & IAs with the newly formed RAASB and IAASB, respectively.


Since RA Regulations mutatis mutandis also apply to proxy advisors. Now, proxy advisors will also be required to get themselves registered with RAASB as provided in the regulation 23(1) of RA Regulations, 2014.


In a proactive move to bolster oversight and ensure robust governance, the stock exchange has also established an internal committee tasked to periodically review the performance of the stock exchange as RAASB/ IAASB and make recommendations to SEBI. The composition of this committee brings into spotlight a multi-pronged approach to regulatory oversight. The committee will include investment industry representatives from various advisory segments, including RAs, IAs, and Proxy Advisors, which aims to foster a more inclusive and adviser-friendly regulatory environment in the market. Further, the inclusion of Public Interest Directors as a majority member in the committee, is seen as keeping investor interests at the forefront of decision-making processes.  


Conclusion 


RAs & IAs play a crucial role in guiding investors to make informed investment decisions. However, there are many unregistered investment advisers who operate illegally and fleece investors of their hard-earned money. The foremost objective of the framework is to protect investor’s interests and create an environment for them to seek accurate, reliable and unbiased financial advice. Most RAs & IAs registered with the SEBI have lauded the move as it puts a check on unregistered financial Advisers that are out there giving financial advices. The issue with such unauthorised advice from unregistered advisers is that, it carries the risk of enticing investors into buying securities or services, which might be sponsoring them. The regulator thus aims to prevent such unauthorised advice from floating in the securities market. Also, the idea of SEBI to come up with two overseeing bodies, which is SEBI themselves and RAASB/IAASB is to have better oversight and increased efficiency.


The latest framework released by SEBI to bring RAs also under the ambit of continuous monitoring on the similar lines of IAs through RAASBs and IAASBs is indeed a welcome step as it is a  positive stride towards the objectives of transparency, integrity and credibility. SEBI’s role as a regulator will remain intact and additionally a stock exchange shall be recognised as supervisory and administering bodies. This will ensure that registered RAs & IAs that render investment advice are duly compliant with regulations set by SEBI. Further it will prove to be instrumental in filling the regulatory gaps that exist to address the issue of unauthorised advice and market recommendations through numerous unregistered channels. Moreover, the RAASBs/IAASBs within the same stock exchange shall ensure its implementation in an efficient & streamlined manner. Thus, with the enhanced industry standards and compliance requirements, a more investor friendly environment can thrive.

 

 


[1] The definition of ‘influencer’ is released by Advertising Standards Council of India under Guidelines for Influencer Advertising in Digital Media. Finfluencers are people with public social media platforms offering financial advices.

50 views0 comments

留言


bottom of page