Stock market regulator Securities and Exchange Board of India (Sebi) will soon likely be able to supervise all financial advisers except those employed by media firms to offer advice to their readers or viewers.
The draft regulation, which is likely to be discussed by its board on 25 October, would rely on Sebi using a “principles-based” approach to regulate financial advisers, especially when their advice covers areas such as insurance which is controlled by a different regulator, said an official in the finance ministry who did not want to be named.
This approach requires Sebi to evolve a code of fair practices for giving advice on financial investment. Advisers will be judged on the basis of the code and their adherence to it, the official said. This approach is significantly different from the general regulatory approach in financial services, where possible violations are examined in the context of detailed laws and not a generic “how-to-work” sort of code.
The “principles-based” approach would look at possible violations in the context of general principles on how advisers should conduct themselves. The official, however, did not disclose details on how punishment to potential violators would be meted out.
This approach has been prompted by the fact that, given the large population of advisers, it would not be feasible for Sebi to effectively monitor a large group, given the limited resources at its command.
In a discussion paper on the subject issued earlier in the year, Sebi had said said there is a view that advisers employed by media organizations could not be brought under its regulatory ambit as “this may constitute denial of freedom of press and may not be constitutional.” Media companies have their own self-regulatory organization and it makes sense to allow it to deal with investment advice coming from media representatives, said the finance ministry official.
However, independent advisers who use the media to make stock recommendations would be brought under the purview of the new guidelines, he added
In the long term, Sebi’s solo effort to regulate investment advisers will be replaced by a common regulatory supervisory mechanism that combines the efforts of several regulators: Sebi, the Insurance Regulatory Development Authority (Irda), the Reserve Bank of India (RBI) and the Pension Fund Regulatory Development Authority (PFRDA).
The four regulators plan a panel to evolve a mechanism to regulate financial advisors, as reported by Mint on 1 October. It might take two years before the effort takes over regulating financial advisers, the finance ministry official said.
“The advantage (of having regulations for advisers) is that it removes some amount of ambiguity,” said Dhirendra Kumar, chief executive officer of Value Research India Pvt. Ltd, a research firm that focuses on mutual funds. The ambiguity would be erased to an extent as “on stock advice, all meaningful advice you can penalize are already in the regulatory ambit,” said Kumar.
Most stock brokers, sub-brokers and registered mutual fund advisers are already registered with Sebi; the remaining professional advisers are, however, difficult to number.