On January 8, 2025, the Securities and Exchange Board of India (“SEBI”) released Circulars outlining the Guidelines for Investment Advisers (“IAs”) and Research Analysts (“RAs”) (“Guidelines”). These Guidelines are aligned with the recent amendments to the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”), and SEBI (Investment Adviser) Regulations, 2013 (“IA Regulations”), dated December 16, 2024 and provide clarifications to the same.
The key aspects of the Guidelines are as follows:
1. Client level segregation of research services/investment advice and distribution activities: Clients of an RA cannot access distribution services within the same group or family, and vice versa. New clients must choose between research or distribution services at onboarding, while existing clients can retain current holdings without being compelled to liquidate or switch. An annual compliance certificate confirming segregation must be maintained by RAs, starting from Financial Year ending March 31, 2025. RAs exclusively serving institutional clients or accredited investors are exempt from segregation rules with a signed waiver. Agreements between IAs and clients must ensure no execution occurs without specific client consent. It is also clarified that Stock broking activity shall not be considered as distribution activity.
2. Guidelines for recommendation of ‘model portfolio’ by RA: Research services provided by RAs will now include model portfolio recommendations, structured in accordance with the detailed framework outlined in Annexure A of the Guidelines. A model portfolio refers to a basket of securities for which a research report is issued by an RA recommending the relevant weightages for one or more securities mentioned therein. Model portfolios must undergo performance validation by a SEBI-specified agency, benchmarked to relevant indices, and accompanied by a detailed factsheet outlining key information such as methodology, disclosures, investment horizon, and updates. Portfolios must include clear labeling, risk disclosures, and adherence to SEBI’s audit requirements.
3. Qualification and Certification Requirements: The revised qualification requirements under the RA Regulations are not mandatory for existing RAs, principal officers, or employees engaged as research analysts. However, they must hold National Institute of Securities Markets (“NISM”) certifications and comply with other stipulated conditions under the Regulations.
4. Deposit Requirements: SEBI has replaced the net worth requirement with a new deposit system under the IA and RA Regulations, requiring IAs and RAs to maintain tiered deposits in scheduled banks marked as lien in favor of Research Analyst Administration and Supervisory Body (“RAASB”)/ Investment Adviser Administration and Supervisory Body (“IAASB”) based on client volume, with deadlines for compliance set for April 30, 2025, for existing registrants and immediate effect for new applicants.
5. Dual Registration as IA & RA: An individual or partnership firm can register as both IA and RA under the IA and RA Regulations, provided they comply with the rules and regulations for each role and maintain an arm’s length relationship between their IA and RA activities, ensuring that investment advisory services and research services are clearly segregated. Further, the IA/RA must also provide an undertaking of maintaining the segregation and ensuring no conflict of interest.
6. Part-Time RAs & IAs: The guidelines require part-time RAs and IAs to meet the same qualifications and certifications as full-time counterparts. They must clearly separate advisory/research services from other activities, disclose conflicts of interest, and include disclaimers for services outside SEBI’s purview. Eligibility extends to professionals such as chartered accountants, architects, lawyers, and teachers, as well as members of the Institute of Chartered Accountants of India (“ICAI”), Institute of Company Secretaries of India (“ICSI”), and Institute of Cost Accountants of India (“ICMAI”). However, engaging in prohibited activities, such as offering unregistered securities advice or making unauthorized performance claims under the SEBI (Intermediaries) Regulations, 2008, disqualifies individuals from registration. Professionals providing advice on non-securities assets like gold, real estate, or cryptocurrency are also ineligible. Notably, a professional offering incidental advice on securities as part of their primary business activity does not require registration. However, security-specific recommendations beyond incidental advice necessitate registration. Clients must also be informed that SEBI will not address complaints related to these activities.
7. Designation as Principal Officer: IA Regulations and RA Regulations provide that partnership firms acting as non-individual RAs/ IAs need to designate a qualified partner as the principal officer. It has been clarified that if no partner meets the required qualifications or certifications, the firm must register as a limited liability partnership or a body corporate latest by September 30, 2025.
8. Appointment of an independent professional as Compliance Officer: The IA & RA Regulations were amended to allow for an independent professional as a compliance officer who shall be a member of ICAI, ICSI or ICMAI and hold relevant certifications from NISM. The guidelines have now provided a clear list of required NISM certifications that such a compliance officer must hold. In such cases, Principal Officer shall also submit undertaking to IAASB/RAASB/SEBI affirming their responsibility of monitoring compliances.
9. Use of Artificial Intelligence (“AI”) Tools: IAs and RAs using AI tools must disclose their usage, ensure data security, confidentiality, and compliance with applicable laws, and take full responsibility for AI-based research services. Compliance is required by April 30, 2025.
10. IA providing advice on products/services outside purview of SEBI: IAs must provide a disclosure to clients when offering advice on products or services that fall outside SEBI’s regulatory purview as part of comprehensive financial planning. The disclosure must clearly state that such products/services are not regulated by SEBI, and clients will have no recourse to SEBI for any grievances related to these products/services. Additionally, IAs must obtain a written undertaking from clients acknowledging this disclosure by April 30, 2025.
11. Fees Charged: SEBI has raised the maximum fee charged by IAs to Rs. 1,51,000 per annum per family, revisable every three years based on the Cost Inflation Index. For existing clients, the earlier cap applies until the current agreement expires or June 30, 2025, whichever is earlier. Fee models can now be changed anytime, replacing the 12-month restriction. For RAs, a similar fee cap applies to individuals and Hindu Undivided Family, excluding non-individual clients and accredited investors, with no advance fees beyond one quarter or breakage fees.
12. Clarity on the term ‘for consideration’ for RAs: It has been clarified that the term ‘for consideration’ would include any consideration received from clients even while availing other services as registered intermediary in another capacity. This means that any indirect consideration shall be considered as consideration received by RA.
For instance, if a stockbroker, who is also registered as a research entity, provides research reports or services for free but earns brokerage when the client uses their stockbroking services, the brokerage will be treated as consideration for the research services.
Other key guidelines include requiring IAs and RAs to secure explicit client consent before executing trades or charging fees, inform clients about the optional Centralised Fee Collection Mechanism for IA and RA (CeFCoM), and maintain comprehensive, timestamped records of KYC, client interactions, and consents for at least five years. Compliance audits must be completed annually, with reports and adverse findings submitted to SEBI or supervisory bodies by October 31 and published online. IAs and RAs must also maintain functional websites by June 30, 2025, and individual IAs serving over 300 clients or managing assets exceeding ₹3 crore must transition to non-individual IA registration within three months of in-principle approval.
Our view
The Guidelines introduce progressive measures like tiered deposits, dual registration, and AI disclosures, thus improving transparency, accountability and flexibility. The clarifications provided by the Guidelines are crucial in alleviating concerns among intermediaries and investors, while also demonstrating SEBI’s commitment to supporting the growth of the IA and RA industries.
However, the increased compliance burdens, particularly those related to performance validation under the model portfolio guidelines, may present significant operational challenges. The requirement for performance validation could impose substantial costs, particularly for smaller RAs who may lack the resources to comply with these more demanding standards. These challenges could create barriers to entry for smaller players and potentially lead to an imbalance in the competitive landscape, with larger entities having the capacity to absorb the higher compliance costs.
You can mail us your queries or comments at Pranjal Kinjawadekar.
