SEBI Clarifies Rules On Associations With Unregistered Investment Advisors And Claim Makers
On January 29, 2025, the Securities and Exchange Board of India (“SEBI”) issued a circular providing clarification on recent amendments to the regulations governing the entities with which SEBI-regulated firms can collaborate.[1] This is to prevent relationships with unregistered investment advisors and those who make unsubstantiated claims about investment performance. These changes affect the SEBI (Intermediaries) Regulations, 2008, the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, and the SEBI (Depositories and Participants) Regulations, 2018.
Background
Amendments to the regulations mentioned above, which were officially published on August 29, 2024, introduce important restrictions on associations. The key takeaway is this: entities that SEBI regulates (this includes Market Infrastructure Institutions like stock exchanges, clearing corporations, and depositories), along with anyone acting on their behalf (their agents), are not allowed to associate with anyone engaging in specific prohibited activities.
These prohibited activities are wdefined as follows:
- Giving advice or recommendations about securities, whether directly or through other means, without being properly registered or authorized by SEBI;
- Making claims about investment returns or performance, either explicitly or implicitly, without SEBI’s permission;
- These restrictions do not apply to those who focus solely on educating investors, as long as they do not get involved, directly or indirectly, in either of the two prohibited activities outlined above.
Key Clarifications
| S.No. | Key Clarifications | Details |
| 1 | Definition of “Persons Regulated by the Board” | This term covers a range of entities, including: Entities registered with SEBI under Section 12 of the Securities and Exchange Board of India Act, 1992.Asset management companies of SEBI-registered mutual funds;Investment managers of SEBI-registered alternative investment funds or infrastructure investment trusts;Managers of SEBI-registered real estate investment trusts;Recognized stock exchanges, clearing corporations, and registered depositories (“MIIs”). |
| 2 | Definition of “Agent” | An “agent,” as defined by Section 182 of the Indian Contract Act, is someone employed to act on behalf of another or to represent them in dealings with third parties. In the context of these regulations, examples of agents include employees, mutual fund distributors, and authorized persons of stock brokers. Whether someone is an agent is determined by the specific facts of the situation. |
| 3 | Restrictions on Association | To reiterate, SEBI-regulated entities and their agents are prohibited from having any direct or indirect association with individuals or entities engaging in the two prohibited activities: providing unregistered investment advice/recommendations and making unsubstantiated return/performance claims. |
| 4 | What Constitutes “Association” | “Association” is interpreted broadly in this context. It includes financial transactions, client referrals, interactions between IT systems, and any other similar relationships, regardless of the specific name given to the association. |
| 5 | Responsibility of Regulated Entities | A crucial point is that SEBI-regulated entities bear the responsibility of ensuring that anyone they associate with, including their agents, does not engage in prohibited activities. |
Conclusion
This circular is intended to provide clear guidance to all SEBI-regulated entities, Market Infrastructure Institutions, and their agents, helping them understand and comply with the regulations regarding permissible associations. By adhering to these guidelines, market participants contribute to a stronger, more transparent, and investor-friendly securities market.
[1] https://www.sebi.gov.in/legal/circulars/jan-2025/details-clarifications-on-provisions-related-to-association-of-persons-regulated-by-the-board-miis-and-their-agents-with-persons-engaged-in-prohibited-activities_91356.html.
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