On April 9, 2021, the Securities and Exchange Board of India (“SEBI”) issued an informal guidance (“Informal Guidance”) in connection with the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) in response to a request from Paytm Money Limited (“PML”). 

PML is registered with SEBI as an investment adviser, as a stockbroker and as a depository participant. PML had requested clarification on the following issues: 

1. Whether PML may avail reimbursement of services related out-of-pocket expenses such as KYC, technology hosting, platform maintenance, etc. from asset management companies whose direct plans they are selling to their clients, in view of Regulation 22A of the IA Regulations which permit an investment advisor to provide implementation services to its clients without charging any commission or brokerage from the client?
2. Whether PML can seek electronic consent of clients to the agreement to be executed by them in terms of Regulation 19(1)(d) of the IA Regulations, specifically to the points mentioned in Annexure A of SEBI circular dated September 23, 2020 on Guidelines for Investment Advisers (“September 2020 Circular”) and share the agreement with the client on their registered email address?
3. Meaning of ‘equivalent management body’ in the definition of “Principal Officer” under Regulation 2(1)(s) of the IA Regulations.
4. Whether the department head in charge of advisory business of PML, who is a member of the management advisory committee appointed by the board to oversee advisory functions, can be appointed as the Principal Officer?

SEBI opined as follows: 

1. Regulation 22A (1) categorically states that an investment advisor cannot receive any consideration, by whatever name called and whether indirectly or directly, at the investment advisor’s group or family level for the implementation services given under Regulation 22A. Thus, PML cannot avail reimbursement of any amounts for the services given to its clients.
2. The September 2020 Circular provides that the investment advisor shall ensure that neither any investment advice is rendered nor any fee is charged until the client has signed the agreement and provided a signed copy to the investment advisor. Accordingly, merely seeking an electronic consent and sharing the agreement with their clients on their email address may not be considered sufficient compliance with the IA Regulations.
3. Regulation 2(1)(s) mandates the Head/ board of directors of a corporate investment advisor to be responsible for the functions and business of the investment advisor. The term ‘equivalent management body’ shall  be used the context of non-individual investment advisors other than a company, such as an LLP which do not have board of directors.  Therefore, a member of a committee appointed by the board of the investment advisor to oversee the advisory functions cannot be the Principal Officer of the investment advisor unless such person is also the managing director or designate director of the board of the investment advisor.

Please find a copy of the Informal Guidance here and a copy of the SEBI Circular dated September 23, 2020 here.

This update has been contributed by Suchita Ambadipudi (Partner) and Smriti Tripathi (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.