How Will A SRO Impact Your Investment Advisory And Mutual Fund Distribution Business   Apr 06, 2019


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It looks like the Securities and Exchange Board of India (SEBI) wants to delegate. And for good reasons...

Like you might have experienced in your case, as your workload increased, you needed a responsible and accountable helping hands to do justice to your job. Similar is the case with the capital market regulator.

With capital markets booming in India, overseeing all the participants under its purview has become a tough task for the capital market regulator.

According to SEBI records, there were 1,136 SEBI-registered investment advisors as on March 19, 2019. And there were approximately 1.24 lakh mutual fund distributors as on February 28, 2019. It's noteworthy that in 2004 the distributor count was just 18,285.

Between 2004 and 2019, the Asset Under Management (AUM) of the Indian mutual fund industry grew from Rs 1.4 lakh crore to Rs 23.16 lakh crore.

As Indian households are likely to park their savings more in financial assets, and the momentum is only bound to pick up pace in the future, the regulator is keen on laying a solid regulatory foundation to facilitate future growth.

Here's the capital market regulator's plan...

Self- Regulatory Organizations (SROs) for a different segment of the securities market.

According to Investopedia, A self-regulatory organization (SRO) is a non-governmental organization which has the power to create and enforce stand-alone industry and professional regulations and standards.

According to the Consultation Paper released by the capital market regulator, on April 01, 2019 the role of the SRO would be the first level regulator for intermediaries in the securities market. The SRO will play a development role, regulatory role, grievance redressal & dispute resolution role, and disciplinary role (see table below):

Table: What will be the SROs role?

Developmental Regulatory Grievance Redressal & Dispute Resolution Disciplinary
Providing Training and Education to its members Granting of membership in SRO/ Recommending to SEBI for grant of a certificate of registration / renewal of certificate of registration of its members Resolution of grievances against the members Taking action in the event of violation of code of conduct
Creating Investor awareness Setting down a Code of Conduct and conducting examination for certification / admission of members Resolution of disputes between members and investors Taking action in the event of violation of regulations
Proving policy inputs inter alia by participating in SEBI committees Supervision and Inspection (offsite and onsite) of its members Resolution of disputes between members -
(Source: Consultation Paper Self Regulatory Organizations in Securities Market)


​Furthermore, SROs will have the authority to expel members or suspend their membership for breach of the code of conduct or any other regulation. They can also impose a non-monetary penalty.

Since SROs would be granted recognition under SEBI, their roles and responsibilities would be similar to that of SEBI.

Who will be the SRO?

An SRO will be required to have adequate experience (direct or indirect) in regulation, supervision, dispute resolution and investor protection. The SRO Regulations provide certain eligibility criteria which, inter alia, include the following:

  • A company incorporated under Section 8 of the Companies Act, 2013

  • The company's Memorandum of Association (MOA) has discharging functions of SRO as one of its main objects

  • The minimum net worth of the company is Rs 1 crore

  • Has adequate infrastructure

  • Has professional competence, financial soundness and general reputation of fairness and integrity

The capital market regulator is keen on recognising an entity as an SRO on nomination basis, after carrying a due diligence exercise, instead of inviting applications and evaluating them before granting the SRO status. SEBI has proposed to form a nomination committee which would include external experts. Taking their considerations into account, SEBI intends to appoint SROs.

Hence, intermediaries, including mutual fund distributors and investment advisors, need not worry about the fairness of the process for granting SRO recognition.

The journey of SRO regulations in India...

To give you a background, the capital market regulator had notified the SRO Regulations on February 19, 2004. As on date, the said regulations are in force only in relation to distributors engaged by Asset Management Companies (AMCs) of mutual funds and distributors hired by portfolio managers. In March 2013, SEBI initiated the process of selection of SRO for mutual fund distributors.

In October 2017, in response to its application, Hon'ble Supreme Court allowed SEBI to undertake a fresh selection process for mutual fund distributors' SRO

In November 2018, in response to SEBI's application to amend SRO Regulations, the Hon'ble Supreme Court noted its observations, "Prayer to amend the Self-Regulatory Organization (SRO) Regulations and to consider the pending cases in the light of the amended Regulations is allowed. We make it clear that we have expressed no opinion on the validity of the amendment(s) proposed."

Following this, SEBI has released a consultation paper seeking comment from the public latest by April 21, 2019, on:

  • Whether there should be single or different SROs for different classes of regulatees?

  • Whether the role of SRO as per the table above and as mentioned in Para 3.2 of the Consultation Paper, is adequate?

  • Is there any need for enhancing the net worth of SRO from Rs 1 Crore as per the extant SRO Regulations notified in 2004? If so, what could be the capital requirement for setting up an SRO?

  • And any other other comments/suggestions regarding the aforesaid proposal or other provisions of the SRO regulations.

The comments may be sent by email to sro@sebi.gov.in or by post (in a prescribed format) to: Ms Jyoti Sharma General Manager Investment Management Department Securities and Exchange Board of India SEBI Bhavan, C4-A, "G" Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051.

What are the implications for mutual fund distributors and investment advisers?

The capital market regulator is cognisant about the role mutual fund distributors and investment advisors are currently playing in a positive way. That said, the regulator is also aware of mis-selling and malpractices in the mutual fund distribution and investment advisory space -- mis-selling of products, churning of portfolio, exorbitant fees, assurance of returns, misconduct etc.

Perpetrators of malpractices may only be a few, the majority of the intermediaries and IFAs won't have anything to worry about. Only that, with a focused SRO in place, intermediaries and IFAs would be keenly watched.

Therefore, mutual fund distributors and investment advisors who do not follow high fiduciary standards while discharging their duties and slip up on compliances; for them, it's time to get serious and be ethical.

Since SROs would act as a connecting point between SEBI, the investors, and intermediaries. They will play an important role in the development of financial markets in India.

How will it benefit investors?

As a result of better and more focused regulations, instances of mis-selling would drop.

The appointment of SROs will be a welcome step for investors. Since SROs, can take disciplinary actions against intermediaries, grievance redressal might happen faster.

Author: PersonalFN Content & Research Team

This article first appeared on Certified Financial Guardian.



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namuba@ymail.com
Apr 07, 2019

best effort for invester
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