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Fintech firms fret over uncertainty in Sebi's investment advisory norms

The uncertainty may hinder investments from PE and venture capital funds

Ashley Coutinho  |  Mumbai 

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The uncertainty in investment advisory norms for nearly a year has prompted another financial services body to write to market regulator Securities and Exchange Board of India (Sebi), asking it to rethink its proposed amendments to the (Investment Advisers) Regulations, 2013. 

India FinTech Forum, a non-profit initiative comprising about 90 fintech firms, has told that it is impractical to separate the roles of advisory and distribution functions, considering the low penetration of mutual funds in India.

Sebi’s consultation paper on amendments to the 2013 rules states that mutual fund distributors (MFDs) should offer suitable schemes to investors considering all the available schemes distributed by them. Further, should not offer any financial planning services to the investor which requires risk-profiling, financial goal-setting, etc, and should refrain from mis-selling. 

“These two provisions are contradictory, as suitable schemes cannot be decided without risk-profiling. Also, if are not advising, then a scenario for mis-selling does not arise,” the body pointed out in its recent note to

The Forum wants the regulator to standardise distributors’ commissions as fund houses offering higher commission for certain schemes could create a conflict of interest for  

In case a customer opts to go through a registered investment advisor (RIA), the migration from regular to direct funds should not have any tax implications or any lock-in related penalties, the Forum has suggested. Also, once an investor selects an RIA and gives electronic/paper-based consent, the registrar and transfer agents (RTAs) must provide free PAN-based consolidated electronic feeds of an investor’s portfolio since inception and on an ongoing basis to the RIA. 

The Forum said the amendments, if carried out, will discourage fintech start-ups to innovate in the area of mutual fund distribution as it takes away the flexibility to decide on the business model. At present, robo-advisors operate as either or RIAs. If the proposed amendments come through, robo-advisors will be compelled to become RIAs or set up subsidiaries to offer advisory services. The prevailing uncertainty may also hinder future investment from private equity and venture capital funds in the space. 

“Digital distribution of mutual funds is important for delivery of good quality advice at lower costs. We suggest the Aadhaar-based limit be modified to Rs 5 lakh per year (instead of the present Rs 50,000 per fund house). Also, the use of Aadhaar eSign needs to be increased for paperless processes,” said Sougata Basu, founder, CashRich and a member of the Forum. 

In June, the regulator had proposed changes to the norms, to prevent conflict of interest between “advising” and “selling” of investment products by the same entity or person. As part of its proposals, an entity offering investment advisory services shall not be permitted to offer distribution/execution services. Banks, non-banking financial companies, and corporate bodies have to form separate subsidiaries to offer advisory services.

In July, United Forum, a forum of national and regional associations of distributors and independent financial advisors, had opposed Sebi’s proposals saying the move would increase mis-selling of mutual fund products and create an unequal playing field between individual and institutional distributors.

First Published: Tue, October 03 2017. 00:00 IST
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