Sebi first released rules for RAs in 2014. The idea was to create a framework through which individuals and entities could provide research and advisory services to the masses. As internet connectivity improved, many began to offer these services online. Now, Sebi has said that anyone who earns money – directly or indirectly – from research reports on securities should be registered as an RA. It’s not yet clear whether this would include brokers who give buy or sell calls.
Why are there so few RAs?
Two hurdles in getting an RA licence are the strict educational qualification and net-worth requirements. The current rules require RAs to have a postgraduate degree or diploma in a specified finance-related field. If the person is only a graduate, an additional five years of experience in a specified field is mandatory. A person also needs to have a minimum net worth of ₹25 lakh to set up a limited liability partnership (LLP) or company.
Sebi has proposed reducing the minimum educational qualification to a graduate degree in a specified field, including finance, accountancy, business management, commerce, economics, capital markets, banking, insurance and actuarial science. For those who simply offer research services, any graduate degree will suffice.
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It has also proposed removing the net-worth requirement, saying RAs could instead maintain deposits with it. The size of this deposit will depend on the number of clients. RAs with less than 150 clients could deposit ₹1 lakh, and this amount would increase with the number of customers. Those with 1,000 or more would have to deposit ₹10 lakh, Sebi proposed.
Under the current rules, RAs also have to take an exam every few years to remain certified by the National Institute of Securities Markets. The prospect of failing an exam and having to forgo their registration is a scary proposition for many RA licence holders. Sebi has thus proposed relaxing this criterion, too, saying they should be required to clear the clean only once – at the time of registration. However, they may still be required to obtain certain certifications every three years based on the incremental changes and developments over that period.
RAs and model portfolios
Mutual funds are highly regulated products with many restrictions. For instance, an MF scheme cannot invest more than 10% in a single company and there is a 20% limit for each sector, too. To be fair, it’s the vehicle most retail investors use, so the regulator has good reasons to keep it vanilla.
Portfolio management services (PMSes) and alternative investment funds (AIFs) offer more advanced strategies but have a minimum ticket size of ₹50 lakh and ₹1 crore, respectively, and are thus out of reach for most investors.
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But some investors with smaller portfolios want access to these strategies. This is where model portfolios offered by RAs and registered investment advisors (RIAs) come in. For a subscription fee, they give you a list of stocks to buy and sell, and in what amount.
For instance, ‘Mi NNF 10’ by Weekend Investing looks to invest in 10 Nifty50 companies based on their momentum. “A rebalance every month ensures that the strongest remain in the portfolio,” said Alok Jain, founder of Weekend Investing. Smallcase, a popular platform that allows RA and RIAs to offer model portfolios, also has ones with specific themes such as ‘rising rural demand’ and ‘affordable housing’.
However, there’s a regulatory hurdle here. Until recently, Sebi held that RAs should not offer model portfolios. On 4 May 2021, the regulator questioned Amit Mohan Jeswani, founder of Stallion Asset, for running two model portfolios called ‘Multibagger’ and ‘Momentum’.
The regular said in its show-cause notice, “It was observed that being a Research Analyst, [Jeswani] was selling model portfolio products to his clients/prospective clients, which is against the defined responsibility of a research analyst as mentioned in SEBI (Research Analysts) Regulations, 2014 and professional standards of research Analysts.” Jeswani eventually paid Sebi a ₹28.6 lakh settlement.
The regulator has now proposed a detailed framework that will allow RA to offer model portfolios (see the infographic below for details). Smallcase did not reply to Mint’s query.
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KYC and advance-fee limit
Sebi has also said RAs should now maintain know-your-customer (KYC) records of all clients with KYC registration agencies. This would increase compliance costs for these businesses.
It also plans to limit advance fees that RAs charge to a maximum of one month. RAs that Mint spoke to said this will make it difficult for them to operate.
Srikanth Meenakshi, co-founder of Prime Investor, said investing is a long-term activity that requires long-term engagement. His company currently offers only one-year and three-year plans, according to its website. One problem with the proposed rule is that a client could come to the website, take the recommendations, exit after a day, and still be eligible for a refund. “I think Sebi should allow at least an annual commitment,” he said.
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Another issue, he said, was that non-finance degrees such as engineering are not recognised as valid qualifications for starting an RA firm, or being a partner or principal officer of a corporate RA. “A lot of analytical and mathematical work is done by engineering graduates in the finance field. Many of them are switching to finance and they bring in a certain amount of mathematical rigour to the research side. So we think engineering should be included,” said Meenakshi.
