Paytm Informal Guidance
What is SEBI’s Informal Guidance Scheme?
SEBI’s Informal Guidance Scheme is introduced by SEBI in-order to ensure better regulation and development of the securities market. Under the scheme, guidance may be sought by the registered intermediaries by way of No-action letters or No-interpretative letter. The guidance issued by SEBI doesn’t constitutes only as a view and doesn’t constitute as a conclusive decision or as an ‘Order’ under the regulations of SEBI.
Facts of the Case
Paytm Money Limited (Paytm) is registered with SEBI as an Investment Adviser (IA), Stockbroker and Depository Participant. Paytm had sought for clarifications of few transactions/ aspects in terms of SEBI (Investment Advisers) Regulation, 2013.
Paytm has mentioned that it performs Risk assessment of its clients and KYC Process, offers advisory services. Depending upon the risk profile, Paytm provides an option to select investment packs (as suggested by AMCs and Morning Star) or their own funds in which they want to invest. Also, Paytm has mentioned that it only offers Direct Mutual Funds and neither receive any commissions from AMCs nor charge any advisory fees from their clients to use the platform.
Queries of Paytm and Comments of SEBIs
Paytm doesn’t charge advisory or execution fees. However, Paytm intends to avail reimbursement of the services related to out-of pocket expenses such as KYC, PG, technology hosting, platform maintenance etc from Asset Management Companies (AMC) whose direct plans they are selling, as Paytm is bearing the cost that the AMC would have borne in case the investments are directly routed through them.
Newly inserted Regulation 22A of the SEBI (Investment Advisers) Regulations, 2013 mentions the provisions related to Implementation or Execution of an advice. The regulations are as follows.
(1) Investment Adviser may provide implementation services to their advisory clients in the securities market:
Provided that investment advisers shall ensure no consideration, including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received; directly or indirectly, at the investment advisers group or family level for the said service as the case maybe.
(2) Investment Adviser shall provide implementation services to its advisory clients only through direct schemes/products in the securities
(3) Investment adviser or group of family of investment adviser entities shall not charge any implementation fees from the
(4) The client shall not be under any obligation to avail implementation services offered by the investment adviser.
i. Regulation 22A (3) restricts a registered IA or its group or family to charge any implementation fees from its clients. Further, Regulation 22A (1) states that the IAs cannot receive any consideration, by whatever name called and whether directly or indirectly, at the IAs group or family level for the said implementation service
ii. In view of the above, Paytm cannot avail reimbursement of any amount for the services given to its clients from the Asset Management Companies whose direct plans are being sold by them to the
i. I As and its group/ family cannot receive any consideration in whatsoever name called for theimplementation service either directly or indirectly either from the client or from any other
ii. Paytm asked for guidance in-order to reimburse the expenses incurred from the AMCs. SEBI has opined that the same tantamount to receipt of consideration and hence Paytm can’t avail reimbursements of expenses.
Agreement has to be signed by the client would involve additional costs. This further increases in the cost would make offering direct plans by Paytm which are in the interest of the investors non-viable.
Whether Paytm can seek electronic consent of the clients on all the points mentioned in Annexure A of the circular and share the same with the client on their registered email address for their records and reference. It would not only save expenses, it would also expediate the entire process. Paytm would maintain all relevant records in this regard.
Agreement between IA and the client
Regulation 19 (1) of the SEBI (Investment Advisers) Regulations, 2013 mandates an agreement as follows:
(d) Copies of agreements with clients, incorporating the terms and conditions as may be specified by the board.
Further, SEBI in its circular no SEBI/HO/IMD/DF1/CIR/P/2020/182 dated 23rd September 2020 has specified the following guidelines as follows:
a. Regulation 19 (1) (d) of the amended IA Regulations provides that IA shall enter into an investment advisory agreement with its The said agreement shall mandatorily cover the terms and conditions provided in Annexure-A.
b. IA can include additional terms and conditions in the agreement without diluting the provisions of SEBI (Investment Advisers) Regulations, 2013 and amendments thereto as well as circulars issued
c. IA shall ensure that neither any investment advice is rendered nor any fee is charged until the clienthas signed the aforesaid agreement and provided copy of signed agreement to the
SEBI stated that merely seeking an electronic consent and sharing the same with the clients on their registered email addresses may not be considered as sufficient compliance with IA regulations and circular.
i. An agreement has to be signed by the client before providing any Advisory services by the IAand before charging any fees incorporating all the terms and
ii. The term ‘signing’ here to be read as manually signed or digitally signed. Mere ticking theterms of the agreement or acceptance of the terms through email communication doesn’t tantamount to
iii. A copy of the agreement has to be shared with the
iv. Information Technology (IT) Act, 2000 recognizes the following digital signatures:
a. Affixing Digital Signature Certificate (DSC)
DSCs are issued by the Certifying Authority (CA) who are granted license under the IT Act, 2000. Such certificated are issued by CA only after verification of the identity and address credentials of the applicant.
b. eSignof documents
Electronic signatures are valid provided such signatures are issued as per the provisions of the IT Act, 2000 and guidelines issued by the Controller of Certifying Authorities.
c. Aadhaar authentication
This works on a two-way authentication system that involves 12-digit Aadhaar number along with the password and one time password (OTP) generated on the mobile number enabled with such Aadhaar.
In-order to comply with the regulations, IA either needs to get the agreement manually signed or digitally signed by any of the modes as mentioned above. IAs who are web based and app based need to realign their internal process to be in line with the regulations.
What would be considered as equivalent management body who is responsible for the overall function of the business and operations. Whether a committee appointed by the board of Paytm to oversee the advisory functions and operations can be considered as a management body and a member of the said committee can be appointed as a Principal Officer.
Alternately, whether the Department head in charge of the Advisory business who is a member of management advisory committee appointed by the board can be appointed as Principal officer as such a person would be responsible for the overall function of the advisory business.
Regulation 2 (1)(s) of the IA regulations defines the term Principal Officer:
‘principal officer’ shall mean the managing director or designated director or managing partner or executive chairman of the board or equivalent management body who is responsible for the overall function of the business and operations of the business and operations of non-individual investment adviser.
A member of Committee (including a Departmental Head in charge of Advisory business) appointed by the board of IA to oversee the advisory functions and operations cannot be the principal officer of the IA, unless he is also the managing director or designated director or managing partner or executive chairman of the Board or equivalent management body of the IA.
SEBI has given its comments going by the literal interpretation of the definition and has only considered the directors of the Company and not considering the CEOs/ Departmental Heads of the Company as an equivalent management body who is responsible for the overall function of the business and operations of the business.
SEBI’s guidance to be welcomed as it brings some clarity on the key aspects of the IA Regulations. Also, looking at the regulations and other communications by SEBI seems to be stricter view of compliances.
One should note that the comments made by SEBI is categorically based on the information provided by Paytm and this letter not be understood as decision of the board. In case of different facts or conditions might lead to different interpretation.
Disclaimer: The views, comments and opinions expressed herein are my personal views and opinions and do not necessarily reflect the official policy and position of any other agency, organization, employer or company. Assumptions made in the analysis are not of the position of any entity other than me. I make no representations as to accuracy, completeness, correctness, suitability or validity of any information and will not be liable for any errors, omissions or damages arising from its use. It is reader’s responsibility to verify their own facts.
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