On December 16, 2024, the Securities and Exchange Board of India (“SEBI”) notified amendments to the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) and the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”) and has significantly modified the regulatory regime governing ‘investment advisers’ (“IAs”) and ‘research analysts’ (“RAs”).  Separately, SEBI has also issued guidelines for IAs and RAs in relation to these amendments. Given the evolving nature of the IA/ RA business, the changes are a welcome step. Key changes introduced are set out below.

1. Changes to the eligibility criteria:

• An individual holding a graduate degree (as opposed to a post-graduate degree) can register as an IA or RA – in case of non-individual IAs/ RAs, these qualification requirements will apply to the principal officer (“PO”) and the persons providing investment advice/ research services;
• Minimum net worth requirements have been replaced with the requirement to maintain a minimum deposit with a bank in the manner prescribed by SEBI^[1] – amounts range between INR 1 lakh to INR 10 lakh (depending on the number of clients); and
• A non-individual IA engaged in multiple line of businesses through separate departments/ divisions may appoint a person at the management level, who is a business head/ unit head, responsible for the overall function of the business and operations related to the investment advisory services, as its PO. Non-individual RAs are now required to appoint a PO as well.

2. Consideration:

 The offering of ‘research analyst’ is now linked to receipt of a consideration (including non-cash benefits) – this will include research services being provided by an RA in its capacity as another registered intermediary (for e.g. providing research reports as a stock broker to its stock broking clients).

3. Scope of investment advice:

• The consultation paper dated August 6, 2024 on review of regulatory framework for IAs and RAs had proposed changes limiting IAs’ ability to offer comprehensive financial planning services. However, basis industry feedback, SEBI has now clarified that ‘investment advice’ under the IA Regulations only covers ‘securities’ under SEBI’s regulatory purview, however, IAs can advise on products/ services outside SEBI’s regulatory purview as well provided appropriate disclosures are made to the clients. For existing clients, IAs have to ensure compliance by April 30, 2025.
• SEBI has excluded ‘investment products’ from the scope of ‘investment advice’. Further, IAs cannot provide ‘trading calls’ to their clients.

4. Fees:

• Presently, an IA can charge fee from clients annually either through: (i) the asset under advice (“AUA”) mode or (ii) the fixed fee mode – the mode of charging fees could be changed only after 12 months of on-boarding/ last change of mode. IAs can now change the mode of fees at any point of time subject to the maximum fee thresholds.
• Fixed fee cap has been increased to INR 1.51 lakh per annum (from INR 1.25 lakh) for IAs. Further, RAs have to now charge a fixed fee (capped at INR 1.51 lakh per annum), for individuals and Hindu Undivided Families (“HUFs”).^[2]

5. Clarifications/ changes to align with the evolving nature of the business:

• Use of Artificial Intelligence (“AI”): The responsibility of investment advisory services/ research services lies solely with the IA/ RA, irrespective of the scale and scenario of usage of AI tools. Further, the extent of use of AI tools must also be disclosed to the client. For existing clients, IAs/ RAs must comply these requirements by April 30, 2025.
• Model Portfolios: SEBI has now included recommendation of ‘model portfolios’ (i.e. a basket of securities for which a research report is being issued by an RA) to fall within the ambit of ‘research services’. RAs providing ‘model portfolios’ will have to comply with detailed guidelines prescribed by SEBI such as defining the methodology, frequency of portfolio review and update, benchmarking and investment horizon etc. RAs engaged in providing model portfolios to their clients are required to comply with these guidelines by June 30, 2025.
• Website: IAs/ RAs have to mandatorily maintain a functional website (in line with SEBI’s requirements) – existing IAs/ RAs have to provide details of their website to the IAASB/ RAASB by June 30, 2025.
• Audit: The annual audit to be conducted by the IA/ RA with respect to compliance with the IA Regulations/ RA Regulations has to be done within 6 months from the end of financial year and can now also be conducted by a member of Institute of Cost Accountant of India (“CMA”) (earlier the audit could be conducted only by a chartered accountant (“CA”) or a company secretary (“CS”)).
• Outsourcing of Compliance Officer: Non-individual IAs/ RAs may appoint an independent professional with relevant certifications from NISM (CA/ CS/ CMA/ any other professional/ person as specified by SEBI) as compliance officer. In such cases, the PO shall be required to submit an undertaking to SEBI/ IAASB/ RAASB to the effect that the PO shall be responsible for monitoring the compliance by the IA/ RA in respect of the regulatory requirements.
• Client level segregation of research services and distribution activities: Similar to the existing requirements under the IA Regulations, SEBI now requires non-individual RAs to ensure client level segregation at group level for research services and distribution services.
• Mandatory Client Consent: The consent of client to terms and conditions disclosed by RA and consent of client to agreement between IA and client has to be obtained through any legally acceptable modes (including Digilocker enabled Aadhaar based e-signature and wet signature). However, per the board memorandum of the SEBI board meeting where these changes were approved, it was clarified that mere ticks/ checks on platforms/ on websites shall not denote consent for these purposes and the same shall be clarified in FAQs. SEBI has not yet released any FAQs in this behalf.

Footnotes:

^[1] Note: Such deposit shall be maintained with a scheduled bank, lien marked in favour of stock exchange in their capacity as supervisory and administrative body (“IAASB” and “RAASB”, for IAs and RAs respectively) for utilization towards dues emanating out of arbitration and conciliation proceedings, if any, under the online dispute resolution mechanism or any other prescribed mechanism, if the IA/ RA fails to pay such dues.

^[2] Note: SEBI has clarified that such fee related provisions are only applicable to individuals and HUF clients of IA/ RAs and shall not apply to non-individual clients and accredited investors. In such cases, the limits and mode of fees payable shall be governed through bilaterally negotiated contractual terms.