On February 12, 2025, the Securities Exchange Board of India (SEBI), issued a consultation paper on the advance fee to be charged by Investment Advisers (“IAs”) and Research Analysts (“RAs”) to their clients (“Consultation Paper”)[1]. The Consultation Paper invites public comments and suggestions, to be submitted at the latest by February 27, 2025. The key features of the Consultation Paper include:
I. Background:
- Under the extant provisions, IAs are allowed to charge fees in advance for a period not exceeding 2 (two) quarters, as agreed by the client, effective from April 01, 2021, pursuant to amendments to the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) which came into force in September 2020.
- Further, as per the amendment to the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”) in December 2024, RAs are permitted to charge fees in advance for a period not exceeding 1 (one) quarter.
- In line with the same, SEBI received various representations from RAs requesting reconsideration of the advance fee provisions.
- It has been submitted that the current provisions limit RAs’ ability to offer long-term recommendations and disrupt existing fee-charging practices. It has been observed that the mandate to charge fees periodically has been inconvenient with additional costs for both clients and RAs.
II. Consideration and Proposal:
- The advance fee provisions were originally introduced to protect investors from being locked into agreements after paying fees in advance. However, RAs have now requested the ability to charge fees for up to 1 (one) year, arguing that the current limitation period only encourages short-term recommendations, which may not serve the best interests of the investors.
- The Association of Registered Research Analysts (ARRAI) highlighted that while extending the advance fee period to 1 (one) year could create challenges for investors seeking early termination, the prompt refund process, mitigates this concern.
- Further, the extant provisions allow IAs to retain a breakage fee of up to 1 (one) quarter’s fee in case of premature termination, while RAs do not charge any breakage fee, thus protecting investor interests.
- In light of these considerations, it has been proposed to allow IAs and RAs to charge fees in advance for up to 1 (one) year, with the understanding that these provisions shall apply solely to individual and Hindu Undivided Family (HUF) clients. The non-individual and institutional clients may negotiate the terms bilaterally.
[1] https://www.sebi.gov.in/reports-and-statistics/reports/feb-2025/consultation-paper-on-advance-fee-to-be-charged-by-investment-advisers-and-research-analysts_91858.html