MUMBAI: Securities and Exchange Board of India has decided to give its earlier plan to split the role of an investment advisor and distributor a renewed push.
The capital markets regulator, in a discussion paper released on Tuesday, proposed entities and individuals, who register as investment advisors, will not be able to sell financial products. The move is likely to find opposition among distributors and brokers, who have argued that the move could impact their business. Mutual funds are likely to lend their informal support to these intermediaries as the step could impact flows into their products
"There should be clear segregation between the two activities of the entity i.e providing investment advice and distribution of the investment prodcuts and execution of investment transactions," said the discussion paper seeking public comments by January 23.
Sebi said banks, non-banking finance companies(NBFCs) and corporates who register as investment advisers will not be able distribute financial products either directly or through holding or subsidiary company.
The regulator said individuals registered as investment advisers too should not distribute financial products either directly or through immediate relatives. Individuals providing distribution services will not be able to provide advice for investing in financial product.
Similarly, banks, NBFCs, corporates, LLPs and firms providing distribution services shall not provide investment advice in financial products either directly or through holding or subsidiary company, the paper said.
A senior mutual fund industry official said these proposals, if implemented, could crimp money flows into financial products . Assets under management rose 38% to Rs. 22.7 lakh crore in November 2017, from Rs. 16.5 lakh crores a year earlier
"The guideline is impractical. This regulation cannot work in a country like India, where investors do not pay for advice," said the chief executive of a large asset management company. "In a country like UK, after introducing the advisory model, the cost of advice for the lower strata of society has gone up."
Sebi said existing registered investment advisers who are offering distribution services through immediate relatives or subsidiary company should choose among providing investment advice or distribution services before March 31.
"From April 01,2019, any person,including their immediate relatives or holding or subsidiary company shall offer either investment advice or distribution services," Sebi said.
This is the third discussion paper by Sebi to split the rules. The first one was in October 2016, while the second version was floated June 2017
Distributors said the new proposals have tried to eliminate some of the potential loopholes in the previous papers.
"The earlier regulation specified that an investment advisor could have a seperately identifiable division/department (SIDD) and if an investor chooses to execute through that, it would be fine. The new regulation does away with SIDD and an advisor or his spouse, brother, sister, father /son cannot have a distribution company," said a Mumbai-based investment advisor. "As per the new draft regulations, existing businesses will have to remodel themselves. This will require clients to reconfigure their relationships."
The investment advisor said these transitions would require atleast three years and it would not be possible to implement them by March 2019, as proposed by Sebi.
Traditionally, individual agents have been the major distribution channel for the sale of financial products.
In recent times, corporates, especially private sector banks have come to play an increasingly important role in distribution. They have dominated distribution with over 30% assets under management share, said the Sumit Bose committee report on curbing mis-selling and rationalising distribution incentives in financial products.