Introduction
If you are a regular visitor to Moneycontrol.com, one of India’s largest financial news website, then chances are you must be aware of ‘Moneybhai’, the virtual stock market trading game. In this game traders / investors get a virtual balance of Rs. 1 crore in their trading account which can be invested in various asset classes such as equity shares, mutual funds, commodities etc. The investor’s virtual portfolio exactly replicates the performance of the actual securities traded in the stock market and displays the virtual profit / loss in individual securities and the overall portfolio. For investors who are beginners in the stock market, this game is a good tool to learn about the nuances of stock market investment. But if SEBI has its way then this game and other stock market virtual games / competitions / leagues will cease to exist. SEBI has introduced a consultation paper for making amendments to Investment Advisor (IA) Regulations.
Proposed amendments / clarifications to SEBI (Investment Advisers) Regulations, 2013
The objective of the consultation paper is to specify uniform standards across all the intermediaries / persons engaged in providing investment advisory services irrespective of whether such activity is incidental to their primary activity or not and to address the gaps or overlaps in legal or regulatory standards.
Let us have a brief look at some of the proposed amendments / clarifications
1) Restriction on offering or organising schemes / competitions / games related to securities market
If this proposal is implemented then entities offering virtual games like Moneybhai will have to shut shop. As per this proposal; entities will not be able to offer or organise any schemes / competitions / games / leagues etc. related to stock markets and hence they will not be able to invite public participation through these events. You may have seen ads like “Predict the Sensex closing level on ‘Muhurat Trading’ day and win exciting prizes” or “Predict the Nifty closing level on F&O expiry day and SMS us at XXXXXX. The top 10 correct or closest predictions will win exciting prizes”.
If SEBI implements this proposal then such competitions will be prohibited. SEBI’s intention behind this move is to protect the interest of the investors and make sure they don’t incur any loss by participating in any of these events. However, with SEBI’s this move, genuine entities who are trying to educate investors or create awareness among them through virtual games and other events may suffer as these events will not be allowed.
2) Re-look on the exemption from registration provided to Mutual Fund Distributors
As per this proposal there will be clear distinction between an ‘independent financial advisor’ and ‘mutual fund distributor’. If an existing mutual fund distributor wants to engage in providing incidental or basic investment advisory services on mutual fund products, then he / she needs to register as an ‘investment adviser’ under IA Regulations. A transition period of 3 years will be provided.
3) Re-look on the exemptions from registration provided to certain persons engaged in providing investment advice
As per this proposal it will be mandatory for all persons engaged in the business of providing investment advice in respect of securities or investment products to register themselves as ‘investment advisor’.
Persons providing advice on insurance products (regulated by IRDAI) and pension products (regulated by PFRDA) will not be required to register with SEBI under IA Regulations.
4) Investment advisory services through a separate subsidiary
As per this proposal banks, NBFCs and body corporates can provide investment advisory services through a separate subsidiary only and not through a separate division / department. While this proposal is investor friendly, small entities may find the process of forming a separate subsidiary cumbersome, time consuming and it will also come at a cost
5) Clarification in respect of investment product and advice in electronic / broadcasting media
The persons providing investment advice through any mass public electronic / broadcasting mediums like newspaper, magazines, etc. shall have to comply with specific provisions of SEBI (Research Analysts) Regulations, 2014. So, even though the above media don’t come under IA Regulations, they still come under the SEBI ambit through the regulations applicable to research analysts.
6) Restriction on providing trading tips
As per this proposal no person shall be allowed to provide trading tips, stock specific recommendations (buy / sell / hold) to the general public through short message services (SMSs), email, telephonic calls or any other social networking media (WhatsApp, Twitter, Facebook, etc.) unless such person obtains registration as an Investment Adviser or is specifically exempted from obtaining registration.
The idea is to prohibit unscrupulous people from soliciting investments and / or promising unrealistic investment returns to the general public through such tips / recommendations and thereby influencing their investment decisions.
7) Advertising Code
As per this proposal an advertisement issued for investor solicitation and / or motivating investors to trade or invest in the securities shall be truthful, fair and clear. It shall not contain any statement, promise or forecast which is untrue or misleading. An advertisement should not refer to any performance or guarantee. The advertisement should be set forth in a clear, concise and understandable manner. The copy of the advertisement shall be retained for five years.
The idea is to protect the interests of the investors. However such stringent measures may make advertisers very cautious about advertisements so that they, even unintentionally, don’t violate the SEBI proposed advertising code and invite SEBI’s ire or some advertisers may skip advertising on some media.
8) Recognition to Chartered Financial Analyst Charter Program from CFA Institute
As per this proposal the Chartered Financial Analyst (CFA) certification program shall be recognised professional qualification under IA Regulations. Qualified CFA individuals shall not be required to obtain certification from either NISM or from its accredited institutions.
Conclusion
These are just some of the many proposals that SEBI intends to implement to protect the investors. Some of the proposals, if implemented, will force some entities like those promoting games, competitions related to securities to shut shop. Unscrupulous people will no longer be able to solicit investments from public through stock tips / recommendations on social media, email, SMS etc. Advertisers will have to follow stringent guidelines while advertising to make sure it is fair and clear without any misleading promises. SEBI has invited public comments on the proposals in the consultation paper by 4th November.