Investing in US Stocks interests you. You have come across a plethora of options. You may want to invest by yourself. Or seek some advice. In this light are overseas investment advisers legal? Or must you choose a local one?
Yet, if you try to build a global portfolio, there are many choices. How do you know who to choose? You want to find an appropriately regulated firm that complies with the laws, and protects your interests.
This article dives into regulations around investment advice and if foreign investment advisers are legitimate based on Indian law.
At Winvesta, we grappled with this early on and consulted with some of the brightest minds from the legal and regulatory world and this article is based on understanding the law and the market through their collective Wisdom and our observations on it.
Before we proceed further, it is important to grasp certain terminologies which will be essential as this piece moves along.
An Investment Adviser (IA) is one who provides investment advice to clients with respect to financial and investment products. On January 21, 2013, the Securities Exchange Board of India (SEBI) notified the SEBI (Investment Advisers) Regulations, 2013 (IA Regulations). The IA Regulations aim to regulate investment advisers and other intermediaries associated with the securities market.
The SEBI IA Regulations defines Investment Advice as:
Thus, if one is helping others invest in Securities, this will be relevant.
Let’s dive into what Securities mean.
As per the Securities Contract Regulations Act, 1956 (SCRA):
However, the term body corporate is not defined in the SCRA.
In such instances, we refer to the Companies Act.
The term body corporate as defined under Section 2(11) of the Companies Act, 2013:
Hence, firms that provide investment advice to Indian investors, even on companies incorporated outside India fall within the purview of the IA regulations.
As a rule of thumb, investment advisers must be located at the same location (country) as the Client. This is a reasonable expectation to protect client interests. Unlike being a broker, who is providing brokerage of a particular product, and needs to thus be differently regulated.
Most jurisdictions adhere to this rule, generally speaking. For e.g. you wouldn’t find a US-based Investment Adviser’s services being marketed in other geographies (like the UK, Europe, or others), for the same reason as it would be illegal and contravening their rules.
The answer is yes, if they offer advice and recommendations to Indian residents.
Here is a myth buster:
Services offered in relation to investing in overseas securities are free from compliance requirements under Indian regulations.
Well, the answer is – wrong.
This brings us to the following conclusion
Overseas Investment Advisers are contravening SEBI(IA) Regulations by offering services to resident Indians. Beware.
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