The Securities Exchange Board of India (“SEBI”), in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 read with SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) vide Circular No. SEBI/HO/MIRSD/ MIRSD-PoD-1/P/CIR/2025/003[1], dated January 08, 2025, issued guidelines for Investment Advisers (“IAs”). The provisions laid down hereunder shall come into effect immediately except certain clauses which shall be effective at a later date (“Guidelines”).
Upon considering the inputs from public consultation, SEBI had issued the Securities and Exchange Board of India (Investment Advisers) (Second Amendment) Regulations, 2024, dated December 16, 2024, which came into effect immediately. In furtherance of the same, SEBI has issued these Guidelines under the amended IA Regulations. The key highlights of the Guidelines are as follows:
I. Deposit Requirements:
(a) Under Regulation 8 of the IA Regulations, IAs must maintain a deposit amount specified by SEBI, which is based on the maximum number of clients they had on any day in the previous financial year. The deposit amounts specified under these Guidelines are as follows:
- Up to 150 (one hundred and fifty) clients: INR 1,00,000 (Indian Rupees One Lakh only)
- 151 (one hundred and fifty-one) to 300 (three hundred) clients: INR 2,00,000 (Indian Rupees Two Lakhs only)
- 301 (three hundred and one) to 1,000 (one thousand) clients: INR 5,00,000 (Indian Rupees Five Lakhs only)
- 1,001(one thousand and one) and above clients: INR 10,00,000 (Indian Rupees Ten Lakhs only)
(b) This deposit must be maintained with a scheduled bank and marked as a lien in favour of the Investment Adviser Administration and Supervisory Body (“IAASB”) in the manner specified by IAASB. The deposit amount shall be updated by April 30 of the following financial year, if there is any change in the number of clients. Further, it is clarified that SEBI will periodically review deposit requirements.
(c) The existing IAs shall comply with this deposit requirement latest by June 30, 2025. However, for new applicants, the requirement is effective immediately from the date of issuance of these Guidelines.
II. Registration:
(a) Registration both as IA and Research Analyst (“RAs”):
The proviso of Regulation 9 of the IA Regulations stipulates that individuals or partnership firms registered as RAs may be granted a certificate of registration as IAs, subject to SEBI’s terms and conditions. The key points highlighted in the for such registration are:
- Eligibility: RAs, who are individuals or partnership firms, registered under the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”), must comply with all rules, regulations, and reporting requirements under both the IA Regulations and the RA Regulations.
- Undertaking: These IAs/ RAs shall provide an undertaking to maintain an arm’s-length relationship between their investment advisory services and research services.
(b) Registration as part-time IA:
According to Regulation 2 (1) (qa) and Regulation 2 (1) (pb) of the IA Regulations, a part-time IA is ‘an individual or partnership firm that is engaged in in any other business activity/ employment which is unrelated to securities and does not involve handling/ managing of money/ funds of client/ person or providing advice/ recommendation to any client/ person in respect of any products/ assets for investment purposes’.
An applicant engaged in activities or employment permitted by any financial sector regulator, or under statutory self-regulatory organizations like Institute of Chartered Accountants of India (“ICAI”), Institute of Company Secretaries of India (“ICSI”), or Institute of Cost Accountants of India (“ICMAI”), shall be eligible for registration as a part-time IA.
However, it is clarified that in line with Regulation 2 (1) (m) read with Regulation 7 of IA Regulations, part-time IAs shall meet the same qualification and certification requirements as full-time IAs under the IA Regulations. The part-time IAs shall further comply with the requirements provided under these Guidelines.
(c) Designation as a ‘principal officer’:
Regulation 2 (1) (s) of the IA Regulations provides that in a partnership firm registered as a non-individual IA, one of the partners must be designated as the principal officer. If none of the partners meet the minimum qualification and certification requirements, the firm must register as an IA in the form of a Limited Liability Partnership (LLP) or a body corporate. This change must be completed by September 30, 2025.
(d) Appointment of an independent professional as Compliance Officer:
According to Regulation 20 of the IA Regulations, a non-individual IA can appoint independent professionals who are members of ICAI, ICSI, ICMAI, or other SEBI-specified professional bodies, provided they have the relevant National Institute of Securities Markets (NISM) certification.
III. Services undertaken by the IAs:
(a) For products and services not regulated by SEBI, IAs shall disclose the same to their clients and obtain a declaration and undertaking from them. This declaration must state that such products/ services and the IA’s services related to them are not under SEBI’s regulatory purview and that clients cannot seek recourse from SEBI for any grievances related to such products/ services. The IAs shall obtain this disclosure and declaration when onboarding new clients and ensure existing clients comply with such requirements latest by April 30, 2025.
(b) Under Regulation 15(14) of the IA Regulations, IAs using Artificial Intelligence (“AI”) tools, regardless of their scale and application, are solely responsible for the security, confidentiality, and integrity of client data. They are also responsible for the use of any information or data to provide investment advice, the advice itself, and compliance with all relevant laws. As per Regulation 18(9) of the IA Regulations, IAs must disclose to clients the extent to which AI tools are used in providing investment advice. This disclosure must be made at the time of entering into the agreement and updated as necessary and existing clients must receive this disclosure and be compliant with these requirements by April 30, 2025.
IV. Fees And Flexibility in Change of Modes of Charging Fee to Clients:
Under Regulation 15A of the IA Regulations, IAs are entitled to charge fees as specified by SEBI. There are two modes for charging fees:
(a) Assets Under Advice (“AUA”) Mode: Fees has been capped at 2.5% of AUA per annum per family of clients across all IA services.
(b) Fixed Fee Mode: Fees are subject to a specified annual limit per family of clients across all IA services.
The maximum fee that an IA can charge under the Fixed Fee Mode has been increased to INR 1,51,000 (Indian Rupees One Lakh Fifty-One Thousand only) per annum, per family of clients. This fee limit shall be reviewed and updated by the IAASB every three years, based on the Cost Inflation Index (CII), after the consultation with SEBI. The Guidelines further provide a detailed compliances regarding the fees and flexibility in change of modes of charging fee to clients, by the IAs.
V. Registration as a non-individual IA:
Regulation 13 (e) of the IA Regulations mandates that an individual IA must apply for in-principle registration as a non-individual IA, if their client count exceeds 300 (three hundred) or if their annual fees surpasses INR 3,00,00,000 (Indian Rupees Three Crores only), whichever comes first. In order to obtain final registration as a non-individual IA, the IA must first surrender their individual IA registration certificate.
VI. Client Level Segregation of Advisory and Distribution Activities:
Regulation 22 of the IA Regulations mandates the segregation of advisory and distribution activities at the family and group level. However, IAs offering services exclusively to institutional clients and accredited investors can bypass this requirement if the client or the investor signs a standard waiver. Additionally, stock broking shall not be classified as a distribution activity under this Regulation 22.
VII. Agreement Between IA and the Client:
- Regulation 19(1)(d) of the IA Regulations require IAs to enter into an investment advisory agreement with their clients, including the Most Important Terms and Conditions (MITC), as specified by SEBI.
- The agreement must state that the IA cannot execute any trades on behalf of the client without their explicit consent for each trade.
- IAs shall provide guidance on the optional Centralised Fee Collection Mechanism (CeFCoM) for IAs and RAs in the agreement.
- Client consent to the agreement can be obtained in person or through legally acceptable modes, including Digi Locker-enabled Aadhaar e-signature.
- The existing clients must be informed, and their consent must be obtained by June 30, 2025.
VIII. Maintenance of record:
Regulation 22A of the IA Regulations provides that the IAs may provide implementation services to advisory clients in the securities market. For implementation/ execution services given via telephone, the IAs must record the client’s consent and ensure all communications are timestamped to maintain a clear audit trail. Compliance with these requirements must be met latest by June 30, 2025.
IX. Compliance audit requirements:
Regulation 19 (3) of the IA Regulations mandate that IAs shall conduct an annual audit to ensure compliance with the IA Regulations. Further, the IA shall be responsible to comply with the provisions for the audit requirements under these Guidelines and ensure that the annual compliance audit report details compliances with each provision of the IA Regulations, along with the circulars and guidelines issued under them.
X. Requirement of Website and the Details on the Website:
- According to Regulation 19A of the IA Regulations, the IAs must maintain a functional website containing the details specified by SEBI.
- IAs must confirm their website details to IAASB by June 30, 2025.
[1] https://www.sebi.gov.in/legal/circulars/jan-2025/guidelines-for-investment-advisers_90632.html