Sebi okays proposal to segregate investment advisory, distribution services

“This was quite a good experience. It has been a deep-dive compared to my previous job, which was like being in the stratosphere”: Ajay Tyagi
The Securities and Exchange Board of India (Sebi) on Monday approved the long-standing proposal to segregate investment advisory and distribution services. According to industry participants, big distributors may now have to re-work their business models.

From now on, an individual or a company will have to opt either providing advisory services or distribution services for investment products, such as mutual funds, portfolio management products, and alternative investment funds. This move may an industry-wide impact as several players at present dabble in both services. Earlier, the market regulator on four occasions had tried to segregate the two services but faced a strong pushback from the industry.

While an individual investment adviser will have no option of offering distribution services separately,  corporate entity may have leeway as long as it keeps segregation at the client-level.
  • Approves regulatory sandbox framework to allow testing of new products
  • Fast-tracks approvals for REITs, InVITs rights issue
  • Non-banking custodians allowed for gold ETFs
  • AMC directed to invest in close-ended schemes 
  • Budget estimates for FY21 approved; surplus not transferred to Sebi
  • Sebi will work on a circular to prevent any new Karvy-like situation

For instance, ICICI Securities will not be able to offer advisory services to the client who is using its distribution services. "The feedback we received showed that allowing such a thing for individual advisers could lead to a conflict of interest," said Madhabi Puri Buch, whole-time member, Sebi.

Another key decision taken by the Sebi board was approving the regulatory sandbox framework. Regulatory sandbox is a term used to define live-testing of new products and services on a small set of customers for a limited period. Under the new framework, a Sebi-registered entity will be allowed to participate on its own or use services of a technology firm. The framework approved by the Sebi is based on a discussion paper it had floated last year.

The board also approved the Budget Estimates for the year 2020-21. The regulator hasn’t accounted for transfer of surplus funds to the consolidated fund of India as proposed in the previous Budget. Sources say the proposal is yet to be notified by the government.

While speaking with reporters after the board meeting, Sebi Chairman  Ajay Tyagi touched upon some of the key issues concerning the capital markets.

Karvy to clear dues
Karvy Stock Broking has written to the NSE that it will clear all its dues by the end of March. Tyagi said nearly ~700 crore in form of securities and funds is due from the brokerage. “Karvy is in the process of selling its stake in one of its subsidiaries. It has even signed the term sheet. It has said that it will clear all outstanding amount by the end of March. The amount involved is good to take care of the shortfall,” said Tyagi. 

The NSE and Sebi have issued strictures against the brokerage for misuse of client securities. Karvy is alleged to have raised funds by pledging securities belonging to its clients for other business activities, such as real estate. Not just its clients, but several top lenders also have been hit by the Karvy scandal.  The regulator also said that it was working on a circular that would prevent any new Karvy-like situation.

Sebi chairmanship was a ‘deep dive’
Tyagi, whose three-year Sebi tenure comes to end this month, said spearheading the market regulator was “quite a good experience”. “This has been a deep dive compared to my previous job, which was like being in the stratosphere,” he said.  Tyagi had taken charge as Sebi chairman on March 1, 2017. Previously, he was additional secretary, investment, in the department of economic affairs. 

Tyagi said he believed in public consultations and along with his team, he worked in a transparent manner. He said development of the bond market and the commodity derivatives market, along with improvement of enforcement action, are some areas that would require “more inputs.”  The government is in the process of appointing a new Sebi chief and has received over three dozen applications for the post.

On separation of CMD post
Tyagi said Sebi had to extend the deadline mandating listed firms to separate their chairman and MD posts because of “ practical difficulties” faced by India Inc. “We are not running companies. They are. Companies must have faced some problems,” he said when asked about the reason for allowing two more years to comply with the norms.



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