06/11/2020 - Indian Economy

KEY POINTS

·         SEBI introduced the first set of amendments to its regulatory framework for investment advisors. While the amendments are a step towards protecting retail investors, the technology neutrality of the regulations remains doubtful.

·         A predominantly younger Indian demographic has recently made a shift towards using investment distribution and advisory mobile applications for equity investments.

·          Automated tools used typically do not have any human intervention, as investment advice is based on a predefined algorithm, which customizes investment plans for each customer platform.

·         In late 2019, SEBI came up with another circular aimed at regulating Investment advisors by way of which a restriction was imposed on Investment Advisiors from providing free trials for any products and services.

·         SEBI also restricted Investment Advisors from accepting part payments for any products or services offered by them. It stipulated that advisers would be required to obtain prior consent and carry out risk profiling for all customers. Such requirements could have unintended consequences for mobile-based apps.

·         In case SEBI’s concern is that such automated tools may not be suitable for everyone, it could consider requiring mobile apps to put controls in place (such as knock-out questions) to identify and eliminate clients who are unsuitable for using such tools for investment.

·         A separate but related perspective is fund-raising for such new-age start-ups. Under FDI norms, foreign investment is permitted for entities engaged in ‘financial services activities.

·          Minimum capitalization requirements have also been imposed by the Ministry of Finance for unregulated financial services activities. In contrast, no minimum capitalization hurdles exist for regulated financial services activities.

·         This distinction imposes a conundrum for new-age businesses at the time of fund-raising. Often, such robo-advisors do not handle customer funds, providing only KYC services to the customers.

·         A question for legal practitioners advising such fintech start-ups is whether the investee company should be treated as a provider of unregulated financial services vis-à-vis a mere technology company? The classification has far-reaching consequences, especially for fledgling companies seeking seed funding where the minimum capitalization requirement can play a disruptive role.

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