October 11, 2015

Challenging SEBI

Reading SEBI’s recent press release which “cautions public to deal with only SEBI registered investment advisers,” my reaction was a mixture of horror and confusion.  On one level, it appeared to be an unprecedented assault on the credibility and livelihood of fund distributors at large.  On another, it appeared to have the potential to significantly impede the spread of mutual funds in India.  Personally, if I were a fund distributor or were running a fund house, I would be challenging SEBI.  It is possible that for some in the fund industry and the fund distribution community, that process may be underway.  This post is meant for those who haven’t yet figured out why such an action would be warranted.

At the heart of my assertion is what I see as an obvious fact: SEBI is contradicting itself.  While the press release correctly references SEBI’s 2013 Adviser Regulations in stating that “no person shall act as an investment adviser unless he has obtained a certificate of registration from the Board under these regulations,” it omits to mention that those regulations exempt some individuals/entities from registering.  Going by the choice of words and the phrasing, this is not an accidental omission.  Consider the first paragraph of the press release:

“The general public is hereby cautioned to deal with only SEBI registered investment advisers and research analysts for availing investment advisory services/ research services. The details of SEBI registered investment advisers and research analysts are available on the SEBI website www.sebi.gov.in The public in general are advised to check the registration status of the entity/person on the SEBI website before availing the investment advisory services/ research services.”

Reading the press release, I couldn’t help thinking about the Delhi policemen who recently filed criminal defamation complaints against the Chief Minister of Delhi for using a certain slang to describe policemen.  SEBI’s press release, by implication, appears to be far more derogatory to fund distributors who have rightfully opted to not register under the regulations.

To be blunt, I think that, in a way, the fund industry and the fund distribution community, as a whole, has brought this upon itself.  Most of the key people and opinion makers never took the Adviser Regulations seriously.  And despite veiled threats by top officials at SEBI, they never believed that these would be followed through.  In fact, one can argue that if, over the years, action had been taken against those who were giving the fund industry and the fund distribution community a bad name, it is quite possible that the Adviser Regulations may not have even come to be.  Be that as it may, with this press release, SEBI has taken its resolve to a whole new level.  This press release may not have been widely seen, but what is to prevent it now from issuing many more such “cautionary” releases?  As I see it, for the fund industry and the fund distribution community, this is a now-or-never situation.

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