On January 2, a consultation paper was issued by SEBI, prohibiting individuals and entities from simultaneously providing advisory and distribution services in relation to the financial products. SEBI has proposed a deadline of March 31, 2019, for existing distributors also providing advisory services to discontinue one. It is important to note that this is a third such paper proposing amendments to the law governing Investment Advisers (IAs) and the language of this paper suggests that the earlier two have been done away with.
The major recommendations in the Paper are: (i) Individual IAs whose immediate relatives distributes financial products will be required to terminate their advisory services. (ii) Incorporated IAs are prohibited from providing distribution services through their parent, subsidiary, or associate entities (entities in which they hold more than 15% of the paid-up share capital or partnership interest). (iii) Distributors of mutual fund products are required to check ‘appropriateness’ (i.e. identification of product which is best suited for the client). (iv) Distributors are required to disclose the list of asset management companies to which they are affiliated with and allow clients to consider other financial products which are not being offered by them.
Firstly, the Paper has used the two terms “investment product” and “financial product” interchangeably, without defining either. A clarity in this respect is of prime importance. Further, an absolute prohibition from practising one’s profession violates the fundamental right guaranteed to the citizens under Article 19(1)(g) of the Indian Constitution. Considering the vast jurisprudence in this regard, the restriction will also fall short of the exemption provided under Article 19(6). Besides this, putting an embargo on the associate entities of an IA from undertaking distribution activities will be counterproductive to the advisory business since few investors engage an “advice only” intermediary above a portfolio manager or a distributor of financial products. Additionally, since majority of the income generation between advisory and distribution is made by the latter, therefore, acceptance of these proposals is likely to threaten the very existence of the advisory industry. Further, it is practically impossible to draw a line between appropriateness and advice and these cannot be separated from each other.
In our opinion, acceptance of these proposals would create a restrictive environment which would not be conducive to the growth of securities market. Instead, a model allowing both distributors and advisers to work together should be created, wherein the issues such as conflict of interest, fiduciary obligations and disclosure requirements are addressed in a manner which is in the interest of both investors and stakeholders, as opposed to the present proposal which essentially hurts the investors.