Sebi Mandates Registered Entities to End Contracts with Unregistered Financial Advisors in Three Months

The Securities and Exchange Board of India (Sebi) has given registered entities and their agents a three-month deadline to end contracts with unregistered financial advisors. This initiative aims to tackle unauthorised financial advice and performance claims in the securities market. Sebi's decision follows an amendment in August, targeting associations between intermediaries like stock exchanges and entities offering financial advice or making performance claims.

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The new rule prevents intermediaries, their agents, or associated persons from maintaining direct or indirect relationships with any entity providing investment advice without Sebi registration. This also applies to those making performance or return-related claims unless specifically authorised by the regulator. However, interactions through designated digital platforms are exempt from these restrictions.

Specified Digital Platforms and Investor Protection

Sebi's circular advises regulated entities, including recognised stock exchanges, clearing corporations, and depositories, to terminate contracts with those involved in unauthorised advisory services within three months. The framework allows associations through specified digital platforms, which will be designated based on their ability to implement robust preventive measures.

Sebi has issued a consultation paper outlining requirements for recognition as specified digital platforms. These platforms must demonstrate their capability to prevent misuse, such as unauthorised advice or misleading performance claims, ensuring investor protection and market integrity.

Individuals or entities solely engaged in investor education are exempt from these restrictions. However, they must avoid offering investment advice or making performance claims related to securities directly or indirectly.

Technological Measures and Compliance

The consultation paper suggests that specified digital platforms should use artificial intelligence or machine learning tools to identify content related to securities. This ensures the entity is Sebi-registered or permitted, preventing unauthorised advice or recommendations.

The platform should ensure genuine investor education content is allowed and that users are not redirected to other media like WhatsApp or Telegram for unauthorised activities. Additionally, the platform should share data with the regulator when requested and act on its inputs.

To help users identify authorised participants, the platform should provide badges to Sebi-registered entities. Only Sebi-registered entities, permitted advertisers, or educational content providers can post securities-related content on the platform.

Public Consultation and Feedback

Sebi has invited public comments on the specified digital platform until November 12. The proposal includes allowing platforms to remove fraudulent content and penalise offenders. This move aims to enhance transparency and accountability in the securities market.

The regulator's efforts focus on safeguarding investors by ensuring that only authorised entities provide financial advice. By implementing these measures, Sebi seeks to maintain market integrity and protect investors from misleading claims.