SEBI’s latest framework to administer investment advisers, research analysts | Explained

The Hindu explores the new SEBI framework for administration of research analysts and investment advisers, which will become effective from July 25

The story so far: Capital markets regulatorSecurities and Exchange Board of India (SEBI) on May 2 introduced a framework for better administration and supervision of Research Analysts (RAs) and Investment Advisers (IAs). The framework envisages that stock exchanges will form dedicated bodies to administer these two essential functions. This is to help SEBI have a thorough vision about the functioning of both RAs and IAs. The framework introduces criteria and rules about the eligibility and functions, among other things, of the two supervisory bodies, and will come into force on July 25. 

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SEBI observed that, given the potential for growth in the number of investors in the country, we would see the emergence of a large number of RAs and/or IAs. Regulations for the former were first notified in December 2014. Since then, the regulator observed, the ecosystem has undergone “significant changes,” prompting a review of the regulations.  

The markets regulator took note of the growth in size of the ecosystem. On March 31, 2015, 27 RAs were registered with them. As of February 20 this year, this numberhad gone up to 1,176, that is, over 40 times in under a decade.  

Its counterparts in Canada and the United States have delegated the responsibility for regulating RAs to self-regulatory organisations, whilst IAs in the two countries are regulated by securities market regulators (alongside the relevant State security regulator in the U.S.). In countries like the U.K., France, Germany, Hong Kong, Singapore, Japan and Australia, the securities market regulator directly oversees the functioning of the two entities.

SEBI felt that the paradigm followed in the U.S. and Canada suffered from certain shortcomings. It observed a possible conflict of interest since the self-regulatory body is directly funded by the industry that it needs to regulate. This also prompted concerns about regulatory interests being potentially intertwined with that of the industry. The other concern relates to inadequate oversight because the self-regulator may not have the essential independence or resources to monitor and enforce necessary actions. 

Thus, SEBI observed that since market institutions already possess experience and have mechanisms in place to manage disputes between investors and intermediaries (including RAs), they could provide “the highest degree of accountability,” as is expected from the body.