KEY REGULATIONS

KEY REGULATIONS (Part 1)

Securities Contracts Regulation Act (SCRA 1956): Regulates the business of dealing in securities, providing direct and indirect control over securities trading and stock exchanges.
SEBI Act 1992: Established to protect investor interests, promote securities market development, and regulate the market.
Key Provisions of SEBI Act 1992:
- Regulates stock exchanges and securities markets
- Registers and regulates intermediaries like stock brokers, investment advisers, and portfolio managers
- Promotes investor education and training
- Prohibits fraudulent and unfair trade practices
- Regulates substantial acquisition of shares and takeovers
SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003: Prohibits fraudulent, unfair, and manipulative trade practices in securities, including acts like misrepresentation, concealment of facts, and promises without intention to perform.
SEBI (Intermediaries) Regulations, 2008:
- Code of Conduct and Ethics: Intermediaries must protect investor interests, maintain high standards of service, and exercise due diligence.
- Key Provisions:
  - Investor protection
  - High standards of service
  - Exercise of due diligence
  - No collusion with other intermediaries
  - Prompt disbursal of dividends and interests
  - Adequate disclosure of information to clients
SEBI (Prohibition of Insider Trading) Regulations, 2015: Prohibits insider trading by individuals with access to unpublished price-sensitive information.
SEBI Investment Advisers Regulations, 2013: Regulates investment advisory services, defining terms like "assets under advice", "family of client", "investment advice", and "investment adviser".
Other Key Regulations:
- Prevention of Money Laundering Act, 2002
- Orders issued by SEBI
- Consequences of violating regulations by registered investment advisers

KEY REGULATIONS

Definition of Investment Adviser: A director or employee, or any sales staff of an investment adviser, including any person occupying a similar status or performing a similar function, irrespective of the nature of association with the investment adviser, who is engaged in providing investment advisory services to the clients of the investment adviser.
Principal Officer: In case of a non-individual investment adviser, the principal officer means the managing director or designated director or managing partner or executive chairman of the board or equivalent management body who is responsible for the overall function of the business and operations of the non-individual investment adviser.
Trading Calls: Means intraday, ultra-short duration, non-delivery based (other than hedging) recommendation or any recommendation related to securities that are not personalized or investor-specific.

Registration

Requirement for Registration: No person shall act as an investment adviser or hold itself out as an investment adviser unless it has obtained a certificate of registration from SEBI under the SEBI (Investment Adviser) Regulations, 2013.
Eligibility Criteria: SEBI shall consider the following factors while granting a certificate of registration:
- Whether the applicant is an individual or a non-individual.
- Whether the applicant, its partners, principal officer, and persons associated with investment advice are fit and proper persons.
- Whether the applicant has the necessary infrastructure to effectively discharge the activities of an investment adviser.
- Whether the applicant fulfills the deposit requirements as specified in regulation 8 of SEBI Investment Adviser Regulations.

Exemption from Registration

Exempted Categories: The following categories of persons are exempt from the requirement of registration:
- Any person who gives general comments in good faith in regard to trends in the financial or securities market or the economic situation.
- Any insurance agent or insurance broker who offers investment advice solely in insurance products and is registered with Insurance Regulatory and Development Authority of India.
- Any pension advisor who offers investment advice solely on pension products and is registered with Pension Fund Regulatory and Development Authority.
- Any distributor of mutual funds, who is a member of a self-regulatory organisation recognised by SEBI or is registered with an association of asset management companies of mutual funds.

Qualification and Certification Requirements

Minimum Qualification: An individual investment adviser or a principal officer of a non-individual investment adviser registered as an investment adviser under these regulations shall have a professional qualification or graduate degree or post-graduate degree or post-graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, or actuarial science.
NISM Certification: An individual investment adviser or principal officer of a non-individual investment adviser, registered under these regulations, persons associated with investment advice, and in case of investment adviser being a partnership firm, the partners thereof who are engaged in providing investment advice, shall have at all times relevant NISM certification as specified by SEBI.

Conditions of Certificate

Conditions: The certificate granted under these regulations shall be subject to the following conditions:
- The investment adviser shall abide by the provisions of the SEBI Act 1992 and these SEBI (Investment Adviser) Regulations, 2013.
- The investment adviser shall forthwith inform SEBI in writing, if any information or particulars previously submitted to SEBI are found to be false or misleading in any material particular or if there is any material change in the information already submitted.
- The investment adviser, not being an individual, shall include the words ‘investment adviser’ in its name.

KEY REGULATIONS (Part 3)

Investment Adviser Registration: A department or division or subsidiary of an investment adviser shall include the words ‘investment adviser’ in its name.
Correspondence: Individuals registered as investment advisers shall use the term ‘investment adviser’ in all their correspondences with their clients.
Part-time Investment Adviser: A part-time investment adviser registered under these regulations shall use the term ‘part-time investment adviser’ in all their correspondences with their clients.
Client Limit: The number of clients of a part-time investment adviser shall not exceed seventy-five in total at any point of time.
Transition to Non-Individual Investment Adviser: Individuals registered as investment advisers whose number of clients exceed three hundred at any point of time or the fee collected during the financial year exceeds three crore rupees, whichever is earlier, shall apply for grant of in-principle registration as non-individual investment adviser.

Key Concepts

Deposit: An investment adviser shall maintain a deposit of such sum, as specified by SEBI from time to time, with a scheduled bank marked as lien in favor of a body or body corporate recognized by SEBI.
General Obligations: An investment adviser shall:
- Act in a fiduciary capacity towards its clients.
- Disclose all conflicts of interests as and when they arise.
- Not receive any consideration by way of remuneration or compensation from any person other than the client being advised.
- Maintain an arms-length relationship between its activities as an investment adviser and other activities.
Fees: An investment adviser shall be entitled to charge fees for providing investment advice from a client, including an accredited investor, in the manner as specified by SEBI.
Risk Profiling: The investment advice and asset allocation for an investor would have to be customized to the ability and willingness of the investor to assume risk, determined by a risk profiling exercise.
Suitability: It is the responsibility of the investment adviser to ensure that investment advice and related investments are appropriate to the client’s risk profile.
Disclosures to Clients: An investment adviser shall make certain disclosures to a prospective client, including:
- All material information about itself.
- Its holding or position, if any, in the financial products or securities which are subject matter of advice.
- Any actual or potential conflicts of interest.
Record Maintenance: An investment adviser is required to maintain records in physical or electronic format for a minimum period of five years.

KEY REGULATIONS (Part 4)

Maintenance of Records: Investment advisers must maintain records of:
- Know Your Client (KYC): Records of the client
- Risk Profiling: Risk assessment and profiling of the client
- Suitability Assessment: Suitability assessment of the advice being provided
- Agreements with Clients: Copies of agreements with clients, incorporating terms and conditions as specified by the SEBI
- Investment Advice: Records of investment advice provided, whether written or oral
- Rationale for Advice: Rationale for arriving at investment advice, duly signed and dated
- Client Register: A register or record containing a list of clients along with PAN, date of advice, nature of advice, details of products/securities, and fee/consideration charged
- Communication Records: Records of communication, including emails and call recordings, with all clients
Record Keeping: All records must be maintained in physical or electronic form and preserved for a minimum period of five years
Digital Signatures: Records maintained in electronic form must be digitally signed
Yearly Audit: Investment advisers must conduct a yearly audit in respect of compliance with regulatory requirements from a member of the Institute of Chartered Accountants of India, Institute of Company Secretaries of India, or Institute of Cost Accountants of India
Website: Investment advisers must maintain a functional website containing details as specified by the SEBI
Compliance Officer: Non-individual investment advisers must appoint a compliance officer or an independent professional to monitor compliance with regulatory requirements
Redressal of Client Grievances: Investment advisers must redress client grievances promptly within the stipulated time period notified by the SEBI
Client Level Segregation: Individual investment advisers cannot provide distribution services, and non-individual investment advisers must have client-level segregation at the group level for investment advisory and distribution services
Implementation of Advice: Investment advisers may provide implementation services to advisory clients, but must ensure that no consideration, including commission or referral fees, is received directly or indirectly
Code of Conduct: Investment advisers must follow the code of conduct set out in the Third Schedule of the SEBI (Investment Advisers) Regulations, 2013, which includes principles such as honesty, fairness, diligence, and confidentiality
Investor Charter: Investment advisers must disclose the investor charter on their websites and in their offices, and provide it during client on-boarding, as specified by the SEBI
Procedure for Action in Case of Default: Investment advisers who contravene any provisions of the SEBI Act or regulations must be dealt with in the manner provided under the SEBI (Intermediaries) Regulations, 2008
Penalty for Default: Investment advisers who fail to comply with regulations or directions issued by the SEBI may be subject to penalties as specified in Regulation 15EB of the SEBI Act 1992

KEY REGULATIONS (Part 5)

Introduction to Regulations: The section discusses key regulations applicable to investment advisers, including the Prevention of Money-Laundering Act, 2002, and the Foreign Exchange Management Act, 1999.
Administration of Investment Advisers:
- Recognition of Stock Exchange Subsidiary: SEBI recognizes a wholly-owned subsidiary of a stock exchange to administer and supervise Investment Advisers (IAs) registered with SEBI.
- Eligibility Criteria: The recognition is based on the eligibility of the parent entity, including a minimum of 15 years of existence, a net worth of INR 200 crores, nation-wide terminals, and an investor grievance redressal mechanism.
- Responsibilities of Subsidiary: The subsidiary is responsible for supervising IAs, grievance redressal, administrative actions, monitoring activities, and maintaining a database of IAs.
IFSC Guidelines:
- SEBI Guidelines: SEBI has issued guidelines for facilitating and regulating financial services in an International Financial Services Centre (IFSC).
- Applicability: All provisions of the Investment Adviser Regulations apply to Investment Advisers setting up or operating in an IFSC.
- Compliance: Persons seeking registration must provide investment advisory services only to specified persons and comply with applicable guidelines issued by overseas regulators.
Prevention of Money-Laundering Act, 2002:
- Definition of Money Laundering: Money laundering involves disguising financial assets to conceal their illegal origin.
- Offence of Money Laundering: The Act describes the offence of money laundering, including concealment, possession, acquisition, or use of proceeds of crime.
- Reporting Entities: Every reporting entity must maintain records, furnish information, and verify client identity to prevent money laundering.
SEBI Guidelines on Anti-Money Laundering:
- Overview: SEBI has laid down guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) for securities market intermediaries.
- Procedures and Obligations: The guidelines provide detailed procedures and obligations for registered intermediaries to ensure compliance with AML/CFT directives.
KYC Registration Agency (KRA) Regulations:
- Definition of KYC: KYC means the procedure for identifying and verifying proof of address, proof of identity, and compliance with rules and regulations.
- Role of KRA: A KRA is required to obtain KYC documents from intermediaries and maintain them as prescribed by SEBI.
- KYC Compliance: Every individual who wishes to invest in securities markets must be KYC compliant, providing personal details and proof of identity and address.
Foreign Exchange Management Act (FEMA):
- Objective: FEMA aims to consolidate and amend the law relating to foreign exchange, external trade, and payments.
- Applicability: FEMA extends to the whole of India and applies to all branches, offices, and agencies outside India owned or controlled by a person resident in India.

KEY REGULATIONS (Part 6)

Introduction: The Foreign Exchange Management Act (FEMA) regulates foreign exchange transactions in India, including capital account transactions.
Key Provisions: Section 6 of FEMA specifies the permissible capital account transactions and their limits for persons resident in India and outside India.
Regulations: The Reserve Bank of India (RBI) has issued specific regulations for:
- Investment by persons resident in India in foreign securities
- Maintenance of foreign currency accounts in India and outside India by persons resident in India
- Remittance of capital assets of persons resident in India
- Investment in India by persons resident outside India
- Foreign currency accounts in India of persons resident outside India
- Remittance outside India of capital assets in India of persons resident outside India

Key Regulations

Foreign Exchange Management (Remittance of Assets) Regulations, 2016: Regulates remittance outside India by a person, whether resident in India or not, of assets in India.
Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident Outside India) Regulations, 2017: Regulates foreign investment in India.
Foreign Portfolio Investment: Any investment made by a person resident outside India in capital instruments where such investment is less than 10% of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Foreign Investment: Any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.

Other Relevant Acts

Indian Contract Act, 1872: Specifies the general principles for contracts, including the basic prerequisites for a contract to be lawful and the kinds of rights and liabilities that arise due to contracts.
Guardian and Wards Act, 1890: Protects the interests of minors and secures their property.
Negotiable Instruments Act, 1881: Defines and amends the law relating to promissory notes, bills of exchange, and cheques.
Insolvency and Bankruptcy Code, 2016: Consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals.
FATCA and CRS: The Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) are international regulations aimed at combating tax evasion.

KEY REGULATIONS

FATCA (Foreign Account Tax Compliance Act): Enacted by the US government to prevent tax evasion by US Nationals, requiring financial institutions to report information about US persons.
CRS (Common Reporting Standards): An effort by the Government of India for the exchange of information between countries to prevent tax evasion.
Reporting Financial Institution (RFI): Defined in Rule 114F(7) as a financial institution resident in India, or a branch of a financial institution located in India, required to maintain and report certain information in respect of each “Reportable Account”.
Financial Institution: Classified into four categories:
- Custodial Institutions
- Depository Institutions
- Investment Entities
- Specified Insurance Companies
Investment Entities: Defined in Explanation (c) to Rule 114F(3) as entities whose primary business consists of one or more activities, such as trading in money market instruments, foreign exchange, or individual and collective portfolio management.

REGULATORY REQUIREMENTS

FATCA Self-Declaration: Required to be filed by all Indian and NRI investors.
CRS Self-Certifications: Required to be uploaded by reporting financial institutions to the KRA system starting from 1 July 2024.
Due Diligence Procedures: Required to be applied by reporting financial institutions to identify reportable accounts.
Form 61B: Required to be filed by reporting financial institutions in respect of identified reportable accounts.

CONSEQUENCES OF NON-COMPLIANCE

Violation of Regulations: Can result in penalties, fines, and cancellation of registration.
Risk to Investors: Unregistered investment advisers can put investors at great risk by misleading them.
Importance of Registration: Registration with SEBI is imperative for investment advisers to ensure compliance with regulations and protect investor interests.

CASE STUDIES

Case 1: Unregistered Investment Adviser: Highlights the importance of registration and compliance with SEBI regulations.
Case 2: False Credentials: Emphasizes the need for genuine documentation and compliance with registration requirements.

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