If you are investing in stocks, mutual funds or any other securities after paying an advisory fee to any individual or an organisation, you should ensure that such entities are registered with SEBI. Also, any fee to be paid for their services should be through a new mechanism to be set up by the market regulator. Not doing so may soon leave you with no option to raise your grievances in case you are duped.
In a bid to curb the growing influence of unregistered entities engaged in providing paid investment advice and research services to investors, the Securities and Exchange Board of India (SEBI) has proposed to create a closed ecosystem for fee collection by SEBI-registered investment advisors (IAs) and Research Analysts (RAs) from their clients.
The markets regulator recently released a Consultation Paper which says the proposed ecosystem will help investors ensure that their payments are reaching only the registered IAs and RAs. Further, this would also help investors “identify, isolate and avoid unregistered entities” who would be unable to access this closed ecosystem.
As per SEBI rules, registered IAs and RAs are allowed to charge fees from clients for providing investment and research advice. The payment of such fees should be through a mode that shows traceability of funds and it should not be in cash.
However, SEBI has noted that many unregistered entities mislead investors in breach of the IA and RA regulations. The Consultation Paper on “Mechanism for Fee Collection by SEBI Registered Investment Advisers and Research Analysts” aims to restrict the proliferation of such unregistered entities.
What SEBI has proposed
The markets regulator has proposed to bring in a separate mechanism for fee collection by IAs and RAs. The payment of fees to IAs and RAs through the proposed mechanism will also provide clarity to investors regarding the registration status of the entity.
“It will also instil confidence among investors that fees are being paid to a SEBI registered IA/RA and will motivate them to approach only registered IAs/RAs for all their investment advisory/research service needs,” the paper says.
In the proposed mechanism, fees will be paid by clients on designated platform/s to be specified/administered by a SEBI-recognised supervisory body. The regulator says that “IAs/RAs shall provide the details of the designated bank account/s in which fees shall be received through the proposed mechanism. These designated bank account/s shall be used solely for collection of fee from investment advisory/research activity.”
Further, the following disclosure shall be made by IAs and RAs to their clients:
“All fee payments made by the client for investment advisory/research services provided by the investment adviser/research analyst shall necessarily be through SEBI specified mechanism for fee collection. Any payment made outside the specified mechanism shall not be considered as payment towards investment advisory/research services under SEBI (Investment Advisers) Regulations, 2013/SEBI (Research Analysts) Regulations, 2014 and no grievances in this regard shall be entertained by SEBI recognised regulatory body or SEBI.”
What the above means is that investors will lose the right to raise any grievance before the market regulator in case they make payments to unregistered entities for investment or research advice.
The consultation paper is currently open for public comments till September 15, 2023.