How Sebi’s reforms could transform India’s investment advisory landscape

The consultation paper, released on Tuesday, also seeks to clarify various ambiguous legal provisions that apply to Sebi registered investment advisors (RIAs). Mint breaks down the proposed norms for RIAs.

India has a mere 984 investment advisors for a population of 140 crore. The advisory sector is vastly underrepresented, especially compared to India’s 4.7 crore mutual fund investors and 9.6 crore direct stock investors (demat account holders). The number of RIAs has plummeted from around 1,300 just a year ago, highlighting the urgent need for reform. Sebi’s consultation paper outlines several relaxations to stem this decline.

Sebi’s proposal

First, Sebi proposes to relax the education and experience criteria. It seeks to do away with the experience requirement of five years and post-graduate degree in specific subjects for an investment advisor.

The markets regulator also proposes to scrap the requirement of post-graduate degree and two-year experience requirements for a person associated with investment advice or PAIA. As per the proposal, a PAIA can be a graduate in any discipline.

The markets regulator also seeks to drop the net worth criterion for an investment advisor and reduce it for a corporate RIA from ₹50 lakhs to ₹5 lakh for up to 1,000 clients, and ₹10 lakh if there are more than 1,000 clients.

RIAs will also have more flexibility in switching between the fixed and percentage fee ( ₹1.25 lakh and 2.5%). The cap will not apply to advice rendered on non-Sebi products such as real estate, gold and National Pension System (NPS).

Investment advisors will have the freedom to provide financial planning for any legal asset class. Corporate RIAs will also be able to offer advice on unregulated products, but through a separate entity and brand name.

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

Additionally, Sebi plans to streamline the certification process. Currently, RIAs must obtain certifications from National Institute of Securities Markets (NISM-Series-XA and XB) at the time of registration and renew them periodically.

The new proposal suggests that investment advisors will only need to acquire the initial certifications. Subsequent renewals will be need to cover incremental changes and developments in the regulatory and professional landscape over the preceding three years. This change aims to alleviate concerns about business continuity and reduce redundancy of certifications.

Industry reactions

Expressing strong support for the consultation paper, Vivek Rege, a registered investment adviser, highlighted its potential to address long-standing issues in the investment advisory industry. “This will correct the side of the curve which was fractured for a long time,” according to Rege. He believes that the proposed changes will significantly lower entry barriers that have previously deterred many from entering the industry.

Rege noted that many individuals were keen to join the investment advisory field but were hesitant due to the stringent entry requirements.

“People were waiting on the sidelines to enter this industry, but they were not able to decide because of the entry barriers,” he said.

The consultation paper’s comprehensive review of these barriers is seen as a crucial step in encouraging new entrants. “With this consultation paper, the whole issue about entry barriers was relooked. Sebi has identified the entry barriers,” said Kavitha Menon, an investment advisor.

She, however noted that Sebi has not explicitly permitted individuals RIAs to advise on areas not under any financial regulator but are entirely legitimate, for instance will, tax planning and international stocks and bonds via liberalised remittance scheme (LRS).

Corporate RIAs have been permitted to advise on unregulated products through a separate brand name and legal entity.