Mint Explainer: How Sebi is cracking down on unregistered investment advisors

SEBI Bhavan at BKC Bandra in Mumbai. (PTI)
SEBI Bhavan at BKC Bandra in Mumbai. (PTI)


  • The regulator’s board approved a proposal for an optional mechanism to allow Sebi-registered investment advisors and research analysts to collect fees from their clients, who will be assured they are interacting with bona fide entities.

Mumbai: India’s market regulator recently issued warning letters to unregistered investment advisors after their activity increased significantly. In the letters, the Securities and Exchange Board of India (Sebi) said that it took such instances seriously and warned them to be cautious and not to indulge in such activities, failing which it would initiate action against them.

Mint takes a closer look at what steps the regulator has taken to check the activities of unregistered advisors and what more Sebi can do about it.


Why is Sebi acting against unregistered investment advisors?

Unregistered investment advisors are those who haven’t signed up with Sebi to offer investment advice. The practice of advising retail investors without being registered with the regulator violates Sebi’s (Investment Advisors) Regulations. 

In most cases, unregistered advisors are not qualified and provide potentially misleading information to investors who are new to the market or are not well-versed with securities. Such advice could compromise investment interest, given the lack of experience of some of these unregistered advisors, their potentially dishonest behaviour, and false qualification claims. 

Sebi regularly warns them and even imposes penalties on them to protect the market’s integrity and prevent any disruption in the capital markets.

Also Read: Stock tips abound on Telegram, Insta. But do all adhere to Sebi’s rules?

What did Sebi propose at its recent board meeting?

On 27 June, the regulator’s board approved a proposal for a mechanism to allow Sebi-registered investment advisors and research analysts to collect fees from their clients. This would be a closed ecosystem and accessible only to those registered with Sebi, giving investors the comfort of interacting with bona fide entities.

The mechanism will help investors avail the services of and make payments to only registered advisors and analysts. It is meant to recognise registered advisors and analysts and help investors differentiate them from unregistered entities. This is currently only an optional mechanism.

Lovaii Navlakhi, director of the Association of Registered Investment Advisors, said that keeping the mechanism optional may not be as effective as mandating it.

“In any case, any new regulation or change is not going to give dramatic results unless everyone in the system is using it," Navlakhi said.

Harsh Roongta, founder of investment advisory firm FeeOnly, said the Sebi regulations for registered advisors and analysts were not advertised enough.

“The existence of a centralised fee collection mechanism should be informed. It is a good mechanism to counter impersonation," Roongta said. He said easing other regulations would ensure and encourage advisors to register themselves.

What is the regulatory thinking behind the proposal?

According to Sebi chairperson Madhabi Puri Buch, “the proposal facilitated safe space for investors—regulated and unregulated." She said trust in the system will improve, and the good players in the market will use it as a differentiator, while investors will know that they are dealing with the rightpeople.

What was Sebi’s recent take on 'finfluencers' and investment advisors?

Sebi also asked registered investment advisors not to associate with 'finfluencers' or financial influencers giving stock tips or unsolicited stock advice. 

At its board meeting, Sebi said registered investment advisors and their agents should not have any direct or indirect association with any other person providing advice or recommendations, unless permitted by Sebi's board.

Also Read: Sebi draws a line in the sand between influencers, educators

What are the registration requirements?

An investment advisor (IA) who did not wish to be identified said the registration requirements are quite tough and may discourage advisors.

"The qualification for IAs is too stringent. Every advisor needs certification and experience. Then, there is an examination which has to be taken every three years, irrespective of the experience," the advisor said. “Any updates in the industry can be made in the module and exams can be taken only on that."

The advisor added that requirements like a net worth of 50 lakh and more than 150 clients to get registered as ‘non-individual advisors’ were too much of a burden on advisors.

Which are the prominent cases that the regulator has acted upon?

In May last year, Chennai-based financial influencer PR Sundar, his business Mansun Consulting, and his co-promoter Mangayarkarasi Sundar settled with the capital markets regulator after accusations that they had offered investment advisory services without the necessary Sebi registration. They also agreed to return the advisory fee.

The same month, following Sundar, financial influencer Gunjan Verma was issued a warning for providing investment advisory services without being registered. The regulator levied a penalty of 100,000 and asked Verma to refund the fees to her clients.

In October, Sebi ordered Mohammad Nasiruddin Ansari, the proprietor of Baap of Chart on social media platforms, and six other associates to deposit 17.21 crore in an escrow account. The money, Sebi said, was obtained by “carrying out unregistered and fraudulent illegal advisory service."

The regulator also imposed a two-year ban on 4W Wealth Management and asked it to refund 12.83 crore after it found that the firm was giving misleading advice to investors.

Also Read: Sebi's dilemma: There exists a fine line between finfluencing and free speech

What do experts say?

Experts said the regulator was always aware of unregistered advisors. However, without any formal complaint against such advisors, Sebi could not take action.

Navlakhi, who is also chief executive officer of International Money Matters Pvt. Ltd, an investment advisory firm, explained that before 2013, there were no regulations for investment advisors, which gave them a free reign to start businesses and become profitable. Once regulations were introduced, it could have posed a challenge to Sebi to tap into unregistered advisors.

Navlakhi suggested that Sebi should simplify the mechanism of filing complaints to ensure that even a layperson could approach the regulator with a grievance.

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