Introduction
The Securities and Exchange Board of India (“SEBI”) has recently introduced significant changes in the regulatory framework for Investment Advisers (IAs) and Research Analysts (RAs). Following the Union budget’s emphasis on simplifying, easing, and reducing the cost of compliance in advisory services, aConsultation Paper on the Review of Regulatory Framework for Investment Advisers and Research Analysts (“Consultation Paper”) was released in August 2024, proposing changes to the framework based on public comments.
Subsequently, SEBI notified amendments in December 2024 as theSEBI (Investment Adviser) (Second Amendment) Regulations, 2024 (“IA regulations”) andSEBI (Research Analysts) (Third Amendment) Regulations, 2024 (“RA regulations”). SEBI recently published Guidelines for Research Analysts (“RA guidelines”) in January 2025. The primary objective for these changes is to widen the availability of IA and RA services to a larger investor base while keeping a check on unregistered entities and affordability in mind.
This article mainly focuses on five major changes, namely deposit requirements, registration as part-time IA/RA, fee requirements, dual registration as both IA and RA and the use of
“Artificial Intelligence” (“AI”) to analyse whether it fulfils the sought objective of SEBI. It critically examines the impact of these changes and further provides solutions to address the existing loopholes in the framework.
The Change in Deposit Requirements
Regulation 8[2] [AD3] [AD4] of the IA Regulation and RA Regulation and recent guidelines for RAs now mention a deposit requirement replacing the net worth requirement. As per the updated IA Regulation, individual IAs[5] [AD6] (i.e., individuals who provide advisory services independently, without being associated with any institution/company) must transition into non-individual IAs (i.e., means a body corporate including a limited liability partnership and a partnership firm) only after reaching three hundred clients or a total fee of ₹3 crore in a financial year, whichever is earlier. It replaces the earlier limit of one hundred fifty clients. Previously, to become a Non-individual IA, a net worth of ₹50 lakh was required, which posed a significant challenge, as many individual IAs could not meet this requirement. Consequently, they were forced to limit their client base below one hundred fifty, whichdrove up the cost of advisory services. Now, with the introduction of deposit requirements, the process of evolving from an individual practice into a non-individual practice has become easier,[7] [AD8] as the ₹50 lakh net worth requirement no longer applies.
Since the financial stability of the advisor instills confidence in clients, the introduction of a deposit requirement is a thoughtful solution. A similar approach is seen in the U.S. The SEC requires registered advisers to disclose material facts about their financial condition that may impair their ability to fulfil contractual commitments. A deposit-based system serves as an assurance mechanism for clients without overburdening advisers. This new regime provides IAs with a sustainable path to scale their business and eventually transition into corporatized entities.
Allowing Part-time Registrations as IAs and RAs
The IA/RA regulations now allow for registration as part-time IA or RA to increase participation in the advisory sector. While the same qualification requirements apply, part-time IAs/RAs are imposed with a client limit of 75 and must use the term “Part-Time IA/RA” in all correspondence to ensure transparency and maintain client trust. These additional requirements prevent apprehensions about a lack of sincerity and ensure the quality of service.
However, part-time IA/RA work will be difficult to pursue in the long run because of the limit on the number of clients, and the minimum qualification requirements can create a space of part-time advisors with limited expertise. At best, this framework will allow newcomers to “test the waters,” but due to the client limit, it is unlikely to sustain long-term careers.
To enhance the framework, it is suggested that part-time IA/RA work should be time-limited for a certain period to encourage individuals to transition into full-time roles. Alternatively, only those who are directly or indirectly linked to the advisory ecosystem should be allowed as part-time IA/RA.
Another issue arises for professionals whose primary work involves incidental advice on securities. For example, CAs offering security-specific recommendations as part of tax planning must now register as part-time RAs. .[9] [AD10] This additional compliance may discourage them from giving any securities-related advice, potentially lowering the quality of their service and forcing clients to seek separate advisors, adding to the overall cost.
The Recommendation in Fees
The RA guidelines have introduced changes in fees following recommendations from the consultation paper. Firstly, since the services of IA and RA overlap, RAs are also subjected to the same maximum fee limit as IAs to create a level playing field. Other changes include a restriction on advances and the option of a “Centralized Fee Collection Mechanism for IA and RA” (CeFCoM).
These modifications have certain gaps. Firstly, 76% of people respondingto the consultation paper were against the provision of a limit on maximum fees. It is advised that such a limit should be left to the market forces. Such a limit is excessive control which[11] [AD12] may discourage new IAs and RAs from entering the market due to financial unsustainability and limits competition, as even highly skilled RAs must adhere to the same cap. Globally, in well-established advisory markets like the U.S., there is no such limit on fees, allowing the market to operate freely.
Secondly, the restriction on the collection of advance fees to only one quarter. This forces advisers to focus on short-term activities and renewals per quarter, harming long-term advisory planning. Many sound strategies require long holding periods to play out. Quarterly justification pressures advisors to suggest unnecessary changes, which will reduce rather than improve the quality of advice This is counterproductive to the goals of the proposed guidelines[13] [AD14] .
Thirdly, the introduction of CeFCoM, aimed at addressing unregistered IAs/RAs, is also flawed. Its rationale that registered advisers could distinguish themselves via CeFCoM, fails because the platform is optional, costly, involves manual client registration, etc. Thesehurdles mean many will continue approaching unregistered RAs. Thus, without strict actions, these guidelines are regulating an already regulated segment. Many unregistered IAs/RAs will likely continue operating in the shadows.[15] [AD16]
A better approach would involve shifting the focus to client education. Clients should be informed of advertisement guidelines for IAs/RAs and encouraged to verify an adviser’s registration number before engaging in their services.
Conditions for Dual Registration as Investment Adviser (IA) and Research Analyst (RA)
SEBI has now permitted individuals and partnership firms to be certified IA and RA [19] [ST20] simultaneously. While this is indeed a remarkable step towards allowing financial advisors more flexibility due to their overlapping services, it also creates a scope for confusion. The guidelines come with conditions of segregation of services, which refers to creating an arm’s length demarcation between advisory and research services. However, a paradoxical situation arises when we consider the mandate of maintaining an arm’s length distance between the execution of these services and yet giving recognition to overlapping services.
While the SEBI has delineated the constituents of advisory and research services, the scope of overlapping services remains to be defined. There have been instances where actions have been taken against RAs and IAs for providing services that were beyond their scope, and with the recent amendments, it would become even more difficult to determine whether a service was provided in the capacity of an IA or RA if a professional holds dual certificates and the scope of service exceeds. Additionally, misuse of data for personal benefits might become another issue since the records formulated in the capacity of a RA might be used to advise clients, wherein the advisory services would be executed based on the reports created in the capacity of RAs. Dual certification is a considerate step, but if the aim is to ease the regulatory framework, SEBI needs to formulate a clear set of criteria that would be required before IAs and RAs provide their services, and a disclosure mechanism also needs to be established.
The Usage of Artificial Intelligence
The SEBI has now officially recognized the usage of artificial intelligence in research and advisory services. It has become mandatory to disclose the usage of AI to customers before providing services, and the IAs and RAs are responsible for ensuring compliance measures and data security. Artificial intelligence in the financial sector is a boon to service providers. The financial sector has also witnessed Robo-Advisors, which are AI-driven platforms and require minimal human intervention to provide financial services. However, there is a necessity for stringent regulatory requirements to be fulfilled before IAs and RAs use AI, and issues of data security and privacy need to be properly addressed to sustain customer trust.
Another concern involves the failure of guidelines to mandate algorithm transparency since customers must be provided with access to not only the information about the usage of AI but also how AI is used. For example, in the USA, Delphia (USA) Inc. and Global Predictions Inc. were charged by the SEC since they had made false claims about the usage of AI in specific ways when, in reality, no such thing existed. A similar incident may occur in the absence of a mandatory transparency mechanism. In India, knowledge about the technicalities of artificial intelligence is limited[21] [ST22] , and if AI is integrated in the financial sector, the responsibility must be to ensure that customers are not left in an uncertain state about the usage of AI and that a complete disclosure is necessitated.
Conclusion
The SEBI has done a commendable job by introducing amendments and guidelines for “Investment Advisors and Research Analysts”, but there is still a need for a more comprehensive regulatory framework that would allow the existing problems to be effectively controlled. The regulatory norms to become a registered IA and RA have been relaxed, while the compliances that the entities need to follow in executing services remain on the rise. The securities market is ever-growing,[23] [ST24] and the objective behind the amendments to ensure informed decisions by the large investor base cannot be achieved until the ambiguities concerning the services are dealt with. It becomes pertinent for SEBI to address these challenges and ensure that investor protection is provided with the utmost importance by mandating the necessary measures and, at the same time, maintaining an inclusive securities landscape.
This article is a part of the DNLU-SLJ (Online) series, for submissions click here.
4th year students, Dr. Ram Manohar Lohiya National Law University
