FINANCIAL ADVISING-2

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 1. Equity market (Primary/secondary)
Major 2. Money market (Short term debt)
3. Capital market
markets in 4. Long term debt market
Indian 5. Forex market

Financial 6. Derivatives market

7. Mutual funds
system 8. Insurance
9. Depositories/Non-depositories

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Stakeholders in Indian Financial system
• Reserve Bank of India
• Other Banks & NBFCs
• Mutual funds
• Insurance
• Depositories
• Exchanges
• Depository participants
• Dealers
• Brokers
• Agents/Sub-agents
• Financial/Investment advisors

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Need for regulation
• With so many markets & intermediaries within the Financial system,
there is need for regulation:
• To instill public confidence for growth of economy
• Money mismanagement could lead to law & order problems
• Ensuring access to information to investors
• Improve country’s image in International Financial system for easier
access to international debt market and attract foreign investors

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Regulatory bodies in Indian financial system
• Reserve Bank of India (RBI)
• Securities & Exchange Board of India(SEBI)
• Insurance Regulatory & Development Authority of India(IRDAI)
• Pension Fund Regulatory Authority of India (PFRDA)
• Ministry of Corporate Affairs (MCA)
• Ministry of Finance (MOF)

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Regulatory environment

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Role of Reserve Bank of India(RBI)Estd.
1935
• Banker to Central/State Govts
• Creates monetary policy
• Offers liquidity support
• Control on payment systems
• Control over NBFCs
• Supervision of Banking sector
• (Regulates Govt securities/Treasury bills, Commercial paper,
Certificates of deposits, Corporate debt (<1 yr maturity), Forex
market, OTC Currency & Interest rate derivatives, Money markets.
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Role of Securities and Exchange Board of
India(SEBI) Estd.1988
SEBI supervises conduct of:
• Stock exchanges & stockbrokers
• Mutual Funds industry
• Debenture trustee
• Underwriters for issue of capital
• Institutional investors
• Merchant Bankers
• Portfolio Managers
• Foreign Venture capitalists
• Credit rating agencies
• Registrar & Transfer agents
• Bankers to issue of capital
• Managers of collective Investment schemes

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Regulatory/Investigative/Licensing role of
SEBI
• Regulates Sweat equity & ESOPs
• Regulates buyback of securities & takeover
• Regulates possible fraudulent & unfair practices in securities market.
• Regulates custodians of securities
• Creates guidelines for Corporate governance
• Exercises powers under delegation of powers under SCR Act
• Regional offices handles matters on consumer protection, investigate issues
relating to insider trading, illegal fund raising, misleading prospectuses, frauds
by Directors, Stockbrokers etc.
• Regulates everything including derivatives traded on an exchange.
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Role of Insurance Regulatory &
Development Authority of India (IRDAI)
• Regulates orderly growth of Life/Non-life insurance industry
• Regulates registration of Insurers/Re-insurers/TPA
• Regulates introduction/withdrawal of Insurance products from market
• Licensing of Agents/Corporate Agents/Brokers/Loss assessors etc.
• Protects interests of policyholders

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Pension Fund Regulatory Authority of
India(PFRDA).Estd 2003
• Regulates and develops pension sector in India
• Supervises all Pension funds in India
• Regulates New Pension Scheme (NPS)

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Self-regulatory bodies
• Association of Mutual Funds of India (AMFI)
• Foreign exchange Dealers association of India (FEDAI)
• Indian Banks Association (IBA)
• Microfinance institutions network (MFIN)

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 Financial/Wealth advisory
• Traditionally, the Bank managers, stockbrokers, insurance agents or
professionals like solicitors/tax consultants used to play the role of
advisories.
• However, each one of them had only the domain specific knowledge
and just superficial understanding of most other products.
• Most clients ended up getting sub-optimal or even wrong advices.
• Against this backdrop, a beginning was made by SEBI by passing
regulations for Investment advisors 2013.

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 Regulatory framework
SEBI (Investment Advisers) Regulations 2013
 Need for regulation
• Two major conflicts in financial distribution space:
• distributor earning commission as agent of product manufacturer (such as a
mutual fund) and performing the role of wealth adviser claiming to protect
the investor’s interests.
• Partiality towards manufacturer who gives better commission

• “no person shall act as an investment adviser or hold itself out as an

investment adviser unless he has obtained a certificate of registration
from the Board under these regulations” (Regulation 3)
Interpretations of Regulations
• Consideration means any form of economic benefit including non-cash benefit, received or
receivable for providing investment advice;
• Financial planning shall include analysis of clients’ current financial situation, identification
of their financial goals, and developing and recommending financial strategies to realize
such goals;
• “Investment advice” means advice relating to investing in, purchasing, selling or otherwise
dealing in securities or investment products, and advice on investment portfolio containing
securities or investment products, whether written, oral or through any other means of
communication for the benefit of the client and shall include financial planning
• (Provided that investment advice given through newspaper, magazines, any electronic or broadcasting
or telecommunications medium, which is widely available to the public shall not be considered as
investment advice for the purpose of these regulations)
• Investment adviser means any person, who for consideration, is engaged in the business of
providing investment advice to clients or other persons or group of persons and includes
any person who holds out himself as an investment adviser, by whatever name called;
Exceptions to Registration
• Any person who gives general comments in good faith in respect of trends in the
financial or securities market or the economic situation where such comments do
not specify any securities or investment product.
• Any insurance agent or insurance broker who offers investment advice solely in
insurance products and is registered with Insurance Regulatory and Development
Authority for such activity;
• Any pension advisor who offers investment advice solely on pension products and
is registered with Pension Fund Regulatory and Development Authority for such
activity;
Exceptions
• Any distributor of mutual funds, who is a member of a self regulatory
organization recognized by the Board or is registered with an association of asset
management companies of mutual funds, providing any investment advice to its
clients incidental to its primary activity;
• Any advocate, solicitor or law firm, who provides investment advice to their
clients, incidental to their legal practice;
• Any member of ICAI, ICSI, ICWAI, Actuarial Society of India or any other
professional body as may be specified by the Board, who provides investment
advice to their clients, incidental to his professional service;
Exceptions
• Any stockbroker or sub-broker registered under SEBI (Stockbroker and Sub- Broker)
Regulations, 1992, portfolio manager registered under SEBI (Portfolio Managers)
Regulations, 1993 or merchant banker registered under SEBI (Merchant Bankers)
Regulations, 1992, who provides any investment advice to its clients incidental to their
primary activity:
• Provided that existing portfolio manager offering only investment advisory services may apply for
registration under these regulations after expiry of his current certificate of registration as a
portfolio manager;
• Any fund manager, by whatever name called of a mutual fund, alternative investment
fund or any other intermediary or entity registered with the Board;
• Any person who provides investment advice exclusively to clients based out of India
• Any representative and partner of an investment adviser which is registered under
these regulations
Qualification and certification requirements
• Individuals registered as an investment adviser under these
regulations and partners and representatives of an investment
adviser:
• A professional qualification or post-graduate degree or post graduate diploma
in finance, accountancy, business management, commerce, economics,
capital market, banking, insurance or actuarial science from a university or an
institution recognized by the central government or any state government or
a recognized foreign university or institution or association; or
• A graduate in any discipline with an experience of at least five years in
activities relating to advice in financial products or securities or fund or asset
or portfolio management.
Qualification and certification requirements
• An individual registered as an investment adviser and partners and
representatives of investment advisers registered under these regulations
offering investment advice shall always have, a certification on financial planning
or fund or asset or portfolio management or investment advisory services:
• from NISM; or
• from any other organization or institution including Financial Planning
Standards Board India or any recognized stock exchange in India provided that
such certification is accredited by NISM.:
• Capital adequacy:
• Body corporates: NW minimum Rs. 25 lakhs
• Individuals: net tangible assets minimum Rs. 1 lakh
Validity and conditions of certificate
• Valid for a period of five years
• The investment adviser, not being an individual, shall include the words
‘investment adviser’ in its name
• Provided that if the investment advisory service is being provided by a separately
identifiable department or division or a subsidiary, then such separately
identifiable department or division or subsidiary shall include the words
‘investment adviser’ in its name;
• Individuals registered as investment advisers shall use the term
‘investment adviser’ in all their correspondences with their clients.
• Firms registered as wealth advisory firms need to appoint an individual as
‘Principal officer’. This person must have the qualifications for advisory.
General Responsibilities
• Act in a fiduciary capacity towards its clients and shall disclose all conflicts of
interests as and when they arise.
• not receive any consideration by way of remuneration or compensation or in
any other form from any person other than the client being advised, in
respect of the underlying products or securities for which advice is provided.
• maintain an arms-length relationship between its activities as an investment
adviser and other activities.
• An investment adviser which is also engaged in activities other than
investment advisory services shall ensure that its investment advisory
services are clearly segregated from all its other activities, in the manner as
prescribed hereunder.
General responsibilities
• ensure that in case of any conflict of interest of the investment advisory activities with
other activities, such conflict of interest shall be disclosed to the client.
• not divulge any confidential information about its client, which has come to its
knowledge, without taking prior permission of its clients, except where such
disclosures are required to be made in compliance with any law for the time being in
force.
• not to enter into transactions on its own account which is contrary to its advice given
to clients for a period of fifteen days from the day of such advice.
• Provided that during the period of such fifteen days, if the investment adviser is of the opinion
that the situation has changed, then it may enter into such a transaction on its own account after
giving such revised assessment to the client at least 24 hours in advance of entering into such
transaction.
• follow Know Your Client procedure as specified by the Board from time to time.
General Responsibilities
• abide by Code of Conduct as specified in Third Schedule.
• not act on its own account, knowingly to sell securities or investment
products to or purchase securities or investment product from a
client.