18. Key Regulations

Securities Contracts Regulation Act (SCRA 1956) –

Overview

• SCRA 1956 is an act that regulates the business of dealing in securities to prevent undesirable transactions.
• It provides direct and indirect control of all aspects of securities trading and stock exchanges.
• The act gives the Central Government regulatory jurisdiction over stock exchanges, securities contracts, and listing of securities on stock exchanges.

Scope of SCRA 1956

• SCRA 1956 regulates the business of dealing in securities and transactions in securities between two persons.
• The act applies to contracts in securities, whether executed or to be executed.
• It covers all securities such as shares, stocks, bonds, debentures, and derivatives.

SEBI Act of 1992: A Comprehensive Overview

The Securities and Exchange Board of India (SEBI) Act of 1992 was established to safeguard the interests of investors in securities and regulate the securities market’s development. The SEBI Act performs various functions to achieve its objectives.

Functions of the SEBI Act:
The SEBI Act performs the following measures:

1. Regulating Securities Markets:
   The SEBI Act regulates the business of securities markets, including stock exchanges and any other securities markets.
2. Registering and Regulating Intermediaries:
   The Act also mandates the registration and regulation of intermediaries associated with the securities market, including stockbrokers, share transfer agents, bankers to an issue, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and depositories.
3. Regulating Collective Investment Schemes:
   The Act regulates venture capital funds and other collective investment schemes, including mutual funds.
4. Promoting Self-Regulatory Organizations:
   SEBI Act also promotes and regulates self-regulatory organizations in the securities market.
5. Prohibiting Fraudulent and Unfair Trade Practices:
   The Act prohibits fraudulent and unfair trade practices related to securities markets.
6. Promoting Investor Education and Training:
   The Act promotes investors’ education and training of intermediaries of securities markets.
7. Prohibiting Insider Trading:
   The Act prohibits insider trading in securities.
8. Regulating Substantial Acquisition of Shares and Takeover of Companies:
   The Act regulates substantial acquisition of shares and takeover of companies.
9. Calling for Information and Inspection:
   SEBI Act calls for information from, undertakes inspection, conducts inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries, and self-regulatory organizations in the securities market.
10. Imposing Penalties and Adjudication Proceedings:
    SEBI Act empowers SEBI to impose penalties and initiate adjudication proceedings against intermediaries who default on certain grounds such as failure to furnish information, return, etc.

SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003

Overview:
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 aims to prevent fraudulent and unfair trade practices in securities market.

Definition of Fraud:
Fraud is defined as an act, expression, omission, or concealment committed to induce another person or his agent to deal in securities, irrespective of wrongful gain or avoidance of any loss.

Instances of Fraud:
Some of the instances of fraud as cited by the regulation are:
a) Wilful misrepresentation of the truth or concealment of material fact.
b) Suggestion of a fact which is not true by a person who does not believe it to be true.
c) Active concealment of a fact by a person having knowledge or belief of the fact.
d) Making a promise without any intention of performing it.
e) Making a representation, whether true or false, in a reckless and careless manner.

SEBI Intermediaries Regulations 2008: Code of Conduct and Ethics

I. Investor Protection

• Every intermediary should protect the interests of investors and provide suitable advice.
• High standards of service should be maintained by the intermediary’s personnel and agents.
• Independent professional judgment should be exercised, and no collusion should take place.

II. Disbursal of Amounts

• The intermediary should promptly disburse any income received or collected on behalf of clients/investors.

III. Disbursal of Information

• The intermediary should make adequate disclosures to clients/investors.
• Misrepresentations and misleading information should not be provided to clients/investors.
• Confidential information should not be disclosed without prior permission, except in compliance with laws.

Note:

• SEBI (Intermediaries) Regulations and the AMFI code of conduct on AMFI website provide further details.
• The code of conduct aims to ensure that intermediaries maintain high ethical standards and protect the interests of investors.

SEBI (Prohibition of Insider Trading) Regulations, 2015 –

Overview:
The SEBI (Prohibition of Insider Trading) Regulations, 2015 aim to prevent insider trading and maintain market integrity.

Who is an Insider:
An insider is a person who is either a connected person or has access to unpublished price-sensitive information.

Prohibited Activities:
Any trading or dealing based on unpublished price-sensitive information is prohibited for insiders.

Systemic Provisions:
Listed companies and intermediaries must follow a fair conduct policy and put in place systemic provisions to prevent insider trading.

Importance:
Insider trading can lead to an unfair advantage for insiders and negatively affect market integrity. The regulations aim to promote fair practices and ensure a level playing field for all investors.

SEBI Investment Advisers Regulations, 2013:

SEBI (Investment Advisers) Regulation, 2013 regulates the activity of providing investment advisory services in various forms by independent financial advisors, distributors, banks, and other such entities.

1. Definitions:
   Important definitions in the regulation include:

• Assets under advice
• Family of client
• Family of an individual investment adviser
• Financial planning
• Investment advice
• Investment adviser
• Non-individual
• Persons associated with investment advice
• Principal officer

2. Registration:
No person shall act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from SEBI under the SEBI (Investment Adviser) Regulations, 2013. The certificate of registration granted by SEBI shall be valid till it is suspended or cancelled by SEBI.

• Eligibility criteria for registration include:
  • Appropriate qualifications and certifications for the investment adviser and persons associated with investment advice.
  • Meeting net worth requirements
  • Being fit and proper persons
  • Having necessary infrastructure to effectively discharge the activities of an investment adviser
  • Meeting other requirements related to the nature of the applicant and the type of investment advisory services proposed.

3. Exemption from Registration for Investment Advisers:

Investment advisers are required to register under SEBI (Investment Adviser) Regulations. However, certain categories of persons are exempt from registration:

1. Persons providing general comments: Any person who gives general comments in good faith in regard to trends in the financial or securities market or the economic situation where such comments do not specify any particular securities or investment product.
2. Insurance agents or brokers: Any insurance agent or insurance broker who offers investment advice solely in insurance products and is registered with IRDAI for such activity.
3. Pension advisors: Any pension advisor who offers investment advice solely on pension products and is registered with PFRDA for such activity.
4. Mutual fund distributors: Any distributor of mutual funds who is a member of a self-regulatory organisation recognised by the Board or is registered with an association of asset management companies of mutual funds, providing any investment advice to its clients incidental to its primary activity.
5. Legal practitioners: Any advocate, solicitor, or law firm, who provides investment advice to their clients, incidental to their legal practice.
6. Professional bodies: Any member of ICAI, ICSI, ICWAI, Actuarial Society of India, or any other professional body specified by SEBI, who provides investment advice to their clients, incidental to his professional service.
7. Fund managers: Any fund manager of a mutual fund, alternative investment fund, or any other intermediary or entity registered with SEBI.
8. Persons providing investment advice exclusively to clients based out of India: Provided that persons providing investment advice to Non-Resident Indian or Person of Indian Origin shall fall within the purview of SEBI (Investment Advisers) Regulation, 2013.
9. Registered investment advisers: Any principal officer, persons associated with advice and partner of an investment adviser which is registered under SEBI (Investment Advisers) Regulation, 2013 provided that such principal officer, persons associated with advice and partner shall comply with Regulation 7 ‘Qualification and certification requirement’ of SEBI (Investment Advisers) Regulation, 2013.
10. Any other person as may be specified by SEBI.

4. Qualification & Certification Requirements and Capital Requirement:

The Regulations specify certain minimum qualifications for a person to be eligible to be known as an investment adviser.

1. Minimum qualifications for an individual investment adviser or a principal officer of a non-individual investment adviser registered under these regulations are:
   a. Professional qualification or post-graduate degree or post-graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central Government or any State Government or a recognized foreign university or institution or association, or a professional qualification by completing a Post Graduate Program in the Securities Market (Investment Advisory) from NISM of a duration not less than one year, or a professional qualification by obtaining a CFA Charter from the CFA Institute.
   b. Experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.
2. Minimum qualifications for persons associated with investment advice are:
   a. Professional qualification as provided in clause (a) of sub-regulation (1) of regulation 7.
   b. An experience of at least two years in activities relating to advice in financial products or securities or fund or asset or portfolio management.
3. Investment advisers registered under these regulations as on the date of commencement of these regulations shall ensure that the individual investment adviser or principal officer of a non-individual investment adviser registered under these regulations and persons associated with investment advice comply with such qualification and experience requirements within three years.
4. An individual investment adviser or principal officer of a non-individual investment adviser, registered.

5. Conditions of Certificate:
The certificate granted under these regulations is subject to the following conditions:

• Abiding by SEBI Act 1992 and the regulations.
• Informing SEBI if any previously submitted information is found false or misleading or if there is any material change in the submitted information.
• Investment adviser’s name must include the term ‘investment adviser’ and individuals must use the term in their correspondences.
• Non-individual advisers shall have a net worth of not less than INR 50 lakhs.
• Individual advisers shall have net tangible assets not less than INR 5 lakhs.
• Individuals whose clients exceed 150 in total must register as non-individual advisers within a specified time.

6. Net worth:
Non-individual advisers shall have a net worth of INR 50 lakhs, while individuals shall have net tangible assets of not less than INR 5 lakhs. Existing advisers shall comply with the net worth requirement within three years from the date of commencement of the regulations.

7. General obligations:

• Investment advisers shall act in a fiduciary capacity towards their clients and disclose all conflicts of interests.
• They shall not receive any consideration or compensation from any person other than the client being advised.
• Advisers shall maintain an arms-length relationship between its activities as an investment adviser and other activities.
• Investment advisory services shall be segregated from all other activities.
• Advisers shall not divulge any confidential information about its client without prior permission.
• Advisers shall not enter into transactions on its account which are contrary to its advice to clients for fifteen days from the day of such advice.
• Advisers shall follow the Know Your Client procedure specified by SEBI.
• Advisers shall abide by the Code of Conduct specified in the regulations.
• Advisers shall not act on its account to sell securities or investment products to or purchase them from a client.
• Prior approval from SEBI shall be taken in case of change in control of the investment adviser.
• Advisers shall furnish to SEBI information and reports as may be specified by SEBI from time to time.
• The investment adviser shall ensure compliance with certification and qualification requirements at all times.

8. Fees:
Investment advisers shall be entitled to charge fees for providing investment advice from a client in the manner specified by SEBI.

9. Risk profiling:
The investment advice and asset allocation for an investor must be customized to the investor’s ability and willingness to assume risk. This is determined by a risk profiling exercise that assesses the attitude towards risk and possible loss in the portfolio and the willingness to pursue an investment plan. Information provided by clients must be updated periodically. Risk profiles must be communicated to the client after the risk assessment is completed.

10.Suitability
Suitability refers to the responsibility of the investment adviser to ensure that the investment advice and related investments are appropriate to the client’s risk profile. The following points are important for an investment adviser to consider when providing investment advice:

• Documented process for selecting investments based on client’s investment objectives and financial situation.
• Understanding the nature and risks of products or assets selected for clients.
• Reasonable basis for believing that a recommendation or transaction meets the client’s investment objectives and risk tolerance.
• Consideration of the client’s experience and knowledge to understand the risks involved in the transaction.

11. Disclosures to Clients
The investment adviser has the responsibility to make certain disclosures to the client in order for them to make an informed decision whether or not to avail their services. These disclosures include:

• Disclosing all material information about themselves including their business, disciplinary history, terms and conditions on which they offer advisory services, affiliations with other intermediaries and any other necessary information.
• Disclosing their holding or position, if any, in the financial products or securities which are subject matter of advice.
• Disclosing any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/securities.
• Adequate disclosure to the client of all material facts relating to the key features of the products or securities, particularly, performance track record.
• Drawing the client’s attention to the warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending to the client.

12. Record Maintenance
An investment adviser is required to maintain records for a minimum period of five years. These records include:

• Know Your Client records of the client.
• Risk profiling and risk assessment of the client.
• Suitability assessment of the advice being provided.
• Copies of agreements with clients, incorporating the terms and conditions as specified by the SEBI.
• Investment advice provided, whether written or oral.
• Rationale for arriving at investment advice, duly signed and dated.
• A register or record containing the list of clients, the date of advice, nature of the advice, products/securities in which advice was rendered and fee, if any charged for such advice.

13. Appointment of Compliance Officer
An investment adviser which is a body corporate or a partnership firm shall appoint a compliance officer who shall be responsible for monitoring the compliance by the investment adviser in respect of the requirements of the Act, regulations, notifications, guidelines, instructions issued by SEBI.

14. Redressal of Client Grievances

• Investment advisers should address client grievances promptly and have adequate procedures for expeditious grievance redressal.
• If a client has grievances related to financial products where investments were made based on investment advice, the regulator of that financial product should handle the complaint.
• Disputes between the investment adviser and clients can be resolved through arbitration or an Ombudsman authorized by any regulatory authority.

15. Client Level Segregation of Advisory and Distribution Activities

• Individual investment advisers cannot provide distribution services, and their families cannot provide distribution services to clients advised by the individual investment adviser.
• Non-individual investment advisers should maintain client level segregation at group level for investment advisory and distribution services.
• A client can either be an advisory client or a distribution services client within a group, and the investment adviser should maintain an arm’s length relationship between its activities as an investment adviser and distributor.
• Compliance and monitoring processes for client segregation should follow SEBI guidelines.

16. Implementation of Advice or Execution

• Investment advisers can provide implementation services to advisory clients in the securities market, but they cannot receive any consideration or commission, directly or indirectly, for the service.
• Investment advisers can provide implementation services only through direct schemes/products in the securities market, and they cannot charge any implementation fees from the client.
• The client is not obligated to avail implementation services offered by the investment adviser.

17. Code of Conduct for Investment Adviser

• Investment advisers should act honestly, fairly, and in the best interests of their clients and the market’s integrity.
• Investment advisers should act with due skill, care, and diligence and employ appropriate resources and procedures needed for the efficient performance of their business activities.
• Investment advisers should seek information from clients about their financial situation, investment experience, and investment objectives relevant to the services provided and maintain confidentiality of such information.
• Investment advisers should make adequate disclosures of relevant material information to clients while dealing with them and ensure that the fees charged to clients are fair and reasonable.
• Investment advisers should try to avoid conflicts of interest and, when they cannot be avoided, disclose them to clients and ensure that clients are fairly treated.
• Investment advisers, including their partners, principal officers, and persons associated with investment advice, should comply with all regulatory requirements applicable to the conduct of their business activities to promote the best interests of clients and the market’s integrity.
• The senior management of a body corporate registered as an investment adviser should ensure the maintenance of appropriate standards of conduct and adherence to proper procedures by the body corporate.

18. Procedure for Action in Case of Default

• Investment advisers who contravene any provisions of the SEBI Act, regulations, or circulars issued the reunder, fail to furnish required information, furnish false or misleading information, fail to submit periodic returns or reports, or do not cooperate in any enquiry, inspection, or investigation conducted by SEBI should be dealt with under the SEBI (Intermediaries) Regulations, 2008.

19. Penalty for default in case of investment adviser

Investment advisers in India are required to comply with the regulations made by SEBI and directions issued by SEBI. If an investment adviser fails to comply with these regulations or directions, they will be liable to a penalty. The penalty imposed shall not be less than Rs.1 lakh but may extend to Rs.1 lakh for each day during which such failure continues, subject to a maximum of Rs.1 crore.

To strengthen the conduct of investment advisers, SEBI has laid down certain requirements such as proper risk profiling, obtaining client’s consent on risk profiling, receiving fees through banking channels only, and displaying the complaint status on the investment adviser’s website.

20. Administration of Investment Advisers

SEBI has decided to recognize a wholly-owned subsidiary of the stock exchange to administer and supervise investment advisers registered with SEBI. To be eligible for recognition, the parent entity, i.e., the stock exchange must have been in existence for a minimum of 15 years and have a minimum net worth of INR 200 crores. They must also have nationwide terminals, an investor grievance redressal mechanism, including arbitration, and investor service centers in at least 20 cities.

The subsidiary of a stock exchange shall have various responsibilities, including supervising IAs both on-site and off-site, grievance redressal of clients and IAs, administrative action, monitoring activities of IAs by obtaining periodical reports, submission of periodical reports to SEBI, and maintenance of the database of IAs. BSE Administration & Supervision Limited has been granted recognition for administration and supervision of investment advisers.

21. IFSC

SEBI (International Financial Services Centres) Guidelines, 2015 provide a broad framework for operating various intermediaries, including Investment Advisers, in the International Financial Services Centers (IFSC) set up under section 18(1) of Special Economic Zones Act, 2005. Investment advisers setting up or operating in IFSC shall comply with all provisions of the Investment Adviser Regulations, the guidelines, and circulars issued thereunder.

Persons seeking registration under the Investment Adviser Regulations, read with these guidelines, shall provide investment advisory services only to those persons referred to in Clause 9 (3) of the IFSC Guidelines. Additionally, persons resident outside India and non-resident Indians seeking advice from IA in IFSC shall comply with the applicable guidelines issued by the relevant overseas regulator/ authority.

Prevention of Money-Laundering Act, 2002

Introduction

• Money laundering involves disguising the proceeds of criminal activity to make them appear legal
• The Prevention of Money-Laundering Act, 2002 (PMLA) aims to prevent money laundering and provide for confiscation of property involved in such activities.

Offences under PMLA

• Section 3 of the PMLA describes the offence of money laundering
• The offence occurs when a person attempts to conceal, possess, acquire, use, or claim proceeds of crime as untainted property

Reporting entities under PMLA

• Section 12 of PMLA stipulates that reporting entities (banks, financial institutions, intermediaries, or designated businesses/professions) must maintain records of all transactions, including client and beneficial owner identities.
• Such records must be maintained for five years and kept confidential.
• Section 12 AA of PMLA outlines enhanced due diligence measures that reporting entities must take before specified transactions.

Specified Transactions

• Specified transactions include any withdrawal or deposit in cash exceeding a certain amount, transactions in foreign exchange or high-value imports/remittances, and other high-risk transactions.
• Reporting entities are required to examine the ownership and financial position of clients undertaking specified transactions and record the purpose and intended nature of the relationship.

SEBI Guidelines on Anti-Money Laundering

• SEBI has laid down guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT).
• These guidelines apply to all intermediaries registered with SEBI and have two parts. The first part includes KYC requirements, and the second part focuses on reporting and monitoring.

Key Provisions of Acts Applicable to Investment Advisory Profession

Foreign Exchange Management Act (FEMA)

Purpose: To regulate and manage foreign exchange, external trade, and payments in India.

Key Provisions:

• Capital account transactions permitted and limits specified in Section 6
• RBI regulates investment by a person resident in India in foreign securities, maintenance of foreign currency accounts in India and outside India by a person resident in India, remittance of capital assets of a person resident in India
• Specific regulations for investment in India by a person resident outside India, foreign currency accounts in India of a person resident outside India, and remittance outside India of capital assets in India of a person resident outside India
• Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is less than 10% of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of capital instruments of a listed Indian company.
• Foreign Investment is any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.

Regulations:

• Foreign Exchange Management (Remittance of Assets) Regulations, 2016 for remittance outside India by a person whether resident in India or not, of assets in India.
• Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 for foreign investment in India
• Master Direction on Foreign Direct Investment issued by RBI includes the above regulations and circulars and notifications amending them.
• Purchase/sale of capital instruments of a listed Indian company on a recognized stock exchange in India by Foreign Portfolio Investors permitted as per Annex 2 of the above regulations.

Indian Contract Act for Investment Advisory Profession

Introduction:
The Indian Contract Act, 1872 is the foundation for all contracts in trade and industry in India. It specifies the general principles for the contracts including the basic prerequisites for a contract to be lawful and the kinds of rights and liabilities that arise due to contracts.

Definition and Essential Elements of Contract:
The Indian Contract Act defines a contract as “an agreement enforceable by law”. Some of the essential elements of a contract include an offer or proposal by one party and acceptance of that offer by another party resulting in an agreement, an intention to create legal relations, free consent of the parties to the contract, a lawful contract, and parties capable of entering into a contract.

Special Kinds of Contracts:
Apart from general principles, the Indian Contract Act deals with special kinds of contracts such as bailment, pledge, indemnity, guarantee, and agency. As an investment adviser, it is important to understand the specific provisions of these contracts.

Importance for Investment Advisory Profession:
An investment adviser is required to enter into an agreement with the client at the outset. All their actions are bound by the terms of the contract entered into. Therefore, it is essential for investment advisers to have a thorough understanding of the Indian Contract Act before entering into any agreement with the client.

Guardian and Wards Act

Definition of terms

• Minor: a person below 18 years of age
• Guardian: a person responsible for the care of a minor’s person, property or both
• Ward: a minor for whom a guardian has been appointed

Power of the Court to make orders

• Section 7: Court may make orders for appointing a guardian of a minor’s person or property, or both, or declaring a person to be such a guardian, for the welfare of the minor
• Order implies removal of any guardian not appointed by will or the Court
• Section 8: persons entitled to apply for order include the person desirous of being the guardian, any relative or friend of the minor, the Collector of the district or other local area within which the minor ordinarily resides or in which he has property, or the Collector having authority with respect to the class to which the minor belongs

Application and procedure

• Court with jurisdiction to entertain application, form of application and the procedure on admission of application and related matters are specifically stated
• Important for investment advisers to read and understand before giving advice in matters related to minors

Understanding the Negotiable Instruments Act, 1881

Introduction:
The Negotiable Instruments Act, 1881 regulates the law relating to promissory notes, bills of exchange, and cheques. The Act was enacted to facilitate transactions related to daily commerce and means of payment.

Key Definitions:

• Promissory Note: A written, unconditional promise to pay a certain sum of money to a specified person, order or bearer.
• Bill of Exchange: A written, unconditional order by the maker directing a certain person to pay a certain sum of money to a specified person, order, or bearer.
• Cheque: A bill of exchange drawn on a specified banker and payable only on demand.

Negotiability of Instruments:

• A negotiable instrument can be a promissory note, bill of exchange, or cheque payable either to order or bearer.
• An instrument is payable to order if it is expressed to be payable to a particular person or order and does not prohibit transfer.
• An instrument is payable to bearer if it is expressed to be so payable or has an endorsement in blank.
• An instrument made payable to two or more payees jointly or in the alternative to one or some of several payees is also negotiable.

Provisions Related to Parties and Liability:

• The Act specifies the capacity of parties to notes, bills of exchange, and cheques as well as their liability.
• The methodology for negotiation, presentment of instruments, payment, and interest is also stated.
• Discharge from liability on these instruments, procedures to be adopted on dishonor, and modes for crossing cheques are also detailed.

International Law and Penalties:

• Chapter XVI of the Act deals with related international law.
• Chapter XVII of the Act provides for penalties for the dishonor of cheques and other offenses.

Insolvency and Bankruptcy Code, 2016:

Introduction

• The Insolvency and Bankruptcy Code, 2016 aims to consolidate and amend the laws relating to insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.
• It creates a single law for insolvency and bankruptcy and applies to various entities, including companies, partnerships, limited liability partnerships, individuals, and others specified by the central government.

Applicability

• The Code applies to various entities, including companies, partnerships, limited liability partnerships, individuals, personal guarantors to corporate debtors, and others specified by the central government.

Bankruptcy

• Bankruptcy refers to a debtor adjudged as bankrupt, each partner of a firm where a bankruptcy order has been made against the firm, or any person adjudged as an undischarged insolvent.

Structure

• The Code is organized into five parts: Preliminary sections, insolvency resolution and liquidation for corporate persons, procedure for insolvency resolution and bankruptcy for individuals and partnership firms, regulation of Insolvency Professionals, Agencies and Information Utilities, and miscellaneous matters.

Understanding FATCA and CRS

Introduction:
Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) are part of global initiatives to prevent tax evasion and promote transparency in financial transactions. In this note, we will discuss the key features of FATCA and CRS and their implications for investors and financial institutions.

FATCA:
The FATCA was introduced by the US government to prevent tax evasion by US citizens and residents. The primary goal of FATCA is to obtain information about US persons from financial institutions in other countries. In India, the Income Tax Act was amended in 2014 to enable financial institutions and intermediaries to report to Central Board of Direct Taxes (CBDT) with respect to US persons. All Indian and NRI investors are required to file a FATCA self-declaration.

CRS:
The CRS is a part of the Indian government’s effort to exchange information between countries for the prevention of tax evasion. Reporting Financial Institutions (RFIs) are required to review their financial accounts by applying due diligence procedures to identify whether any of the financial accounts are reportable accounts. If an account is identified as a reportable account, the RFI must report the relevant information in Form 61B in respect of the identified reportable account. The reporting obligation applies to entities that may be legal persons or legal arrangements such as a corporation, a trust, or a partnership.

Classification of Financial Institutions:
The definition of Financial Institution in Rule 114F(3) classifies FIs into four different categories, namely, Custodial Institutions, Depository Institutions, Investment Entities, and Specified Insurance Companies. The definition of Investment Entities is further classified into two types based on their primary business activities and gross income.

Implications for Non-Banking Finance Companies (NBFCs):
NBFCs that accept deposits in the course of a banking business or a similar business as mentioned in the definition of Depository Institution will be considered Depository Institutions and will report accordingly. An NBFC working as an Investment Entity will report accordingly.

MAJOR TAKEAWAYS/LEARNINGS:

From the above cases, we can understand the following principles that Investment Advisers must follow:

1. Registration is mandatory: Any person who is engaged in providing investment advisory services must obtain registration from SEBI and comply with the provisions of SEBI Investment Adviser Regulations. Unregistered investment advisers can mislead investors and put their money at risk.
2. False credentials are not acceptable: Investment advisers must provide genuine credentials at the time of registration. Submitting false documents to obtain registration is a violation of regulations, and SEBI can cancel the certificate of registration.
3. Promising high returns is a violation: Investment advisers cannot promise exorbitant returns to their clients since they are required to take utmost precaution to protect the interests of investors. Misleading clients with false promises can lead to a violation of regulations.
4. Free trials should not be used as a bait: Investment advisers must not use free trials as a bait to solicit clients. The clients must be allowed to choose whether to continue with the service or not after the free trial period ends.
5. Remedies may not be available for unregistered advisers: If an unregistered investment adviser defaults in meeting its obligation to investors, the normal remedies available to investors while dealing with SEBI registered intermediaries may not be available in this case. This can put investors at a greater risk, and hence it is important to deal only with registered investment advisers.

In summary, these cases highlight the importance of following SEBI regulations while providing investment advisory services to investors. Violations can lead to severe consequences, including cancellation of registration and prohibition from the securities market. Investors must be vigilant while choosing an investment adviser and ensure that they are registered with SEBI.