Introduction

Many a times, tax professionals provide Investment related services knowingly or unknowingly either for the tax panning or for the wealth planning for a client. This activity may trigger the applicability of Investment Adviser Regulations which comes under SEBI’s ambit.

This article analyses the impact of SEBI’s Investment Adviser Regulations on tax professionals and their practice. To do so, it briefly explains the following concepts: SEBI and its role, BASL and its role, Investment Adviser, Investment advice, Financial planning as per this regulation and how it relates to Investment advice. It also discusses the implications for tax professionals who advise their clients on tax planning and other matters, the precautions they should take, and whether they need to register as Investment Advisers.

SEBI and its Role in the Indian Securities Market

The Securities and Exchange Board of India (SEBI) is the Regulator of the financial markets in India. It acts as a watchdog for all the capital market participants. It was established in 1988 and was given statutory powers in 1992 with the passage of the Securities and Exchange Board of India Act, 1992. SEBI plays an important role in regulating the securities market of India. It ensures that the three main participants of the financial market are taken care of i.e., issuers of securities, investors, and financial intermediaries. Its main purpose is to provide an environment that facilitates the efficient and smooth functioning of the securities market. Here are some of the key roles and functions of SEBI in the Indian securities market: –

• Regulatory Oversight

SEBI formulates and enforces rules and regulations to govern various participants in the securities market, including stock exchanges, brokers, mutual funds, and listed companies. It monitors and regulates activities such as insider trading, fraudulent and unfair trade practices, and market manipulation to maintain market integrity.

• Investor Protection

  SEBI’s primary concern is to protect the interests of investors in the securities market. It does so by ensuring that companies disclose accurate and timely information to the public. SEBI also regulates collective investment schemes (like mutual funds) to safeguard the interests of investors in these schemes.

• Market Development

  SEBI promotes the development and growth of the securities market by introducing reforms and initiatives to make it more competitive and efficient. It encourages the use of technology and innovation in trading, settlement, and clearing processes.

• Supervision of Market Intermediaries

  SEBI regulates various market intermediaries, such as stockbrokers, and depository participants, to ensure that they follow prescribed norms and maintain high standards of professionalism.

• Listing and Disclosure RequirementsSEBI prescribes listing requirements for companies looking to get their securities listed on stock exchanges. It ensures that these companies meet minimum standards of corporate governance and financial disclosure.
• Surveillance and Enforcement

  SEBI employs surveillance mechanisms to monitor market activities for irregularities and potential violations of regulations. It takes enforcement actions against entities and individuals found guilty of violating securities laws.

• Research and Education

  SEBI conducts research and provides educational resources to enhance awareness and knowledge among market participants and investors.

• Regulatory Framework

  SEBI continually updates and revises the regulatory framework to align it with evolving market dynamics and global best practices.

SEBI (Investment Advisers) Regulations, 2013

Since, Investment Adviser is one of the Financial Intermediary and regulated by SEBI, Regulations, Circulars and guidelines are issued by it which are to be adhered by the Investment advisers. The regulations are known as SEBI (Investment Advisers) Regulations, 2013 (“ IA Regulations ”) which were first notified by SEBI in the official gazette on 21st January 2013 to regulate and streamline the activities of individuals and entities offering investment advisory services. These regulations were implemented to ensure transparency, accountability, and investor protection in the financial advisory sector. While the primary objective of these regulations was to safeguard investors’ interests, they have also had a significant impact on tax professionals in India who offer financial advisory services.

IA Regulations provide that 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 the SEBI. No person, while dealing in distribution of securities, shall use the nomenclature ‘Independent Financial Adviser (IFA)’ or ‘Wealth Adviser’ or any other similar name unless registered with the SEBI as Registered Investment Adviser (“RIA”). Hence, registration is compulsory for carrying out investment advisory activities. In India, there are 1328 registered Investment Advisers as on 31st July 2023.

Let us first understand the concept of Investment adviser and certain Key definitions related to it.

Key Definitions

According to Reg. 2 (1) (m) of IA Regulations, “investment adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called;

as per Reg. 2 (1) (g) “consideration” means any form of economic benefit including non-cash benefit, received or receivable for providing investment advice;

as per Reg. 2 (1) (l) “investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning:

Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations;

And as per Reg. 2 (h) “financial planning” shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realise such goals;

Hence, it is clear that to be RIA, the person must provide investment advice for consideration and also include the person who helps his clients to accomplish their financial goals by recommending them financial strategies after analysing their financial situation.

IA regulations provide for smooth functioning of RIA by providing them a Code of Conduct of Investment Adviser and guidelines for do’s and don’ts. Due to this, there is transparency, proper disclosure including disclosure on Conflict of Interest and thereby increases Investor confidence.

The industry has various investment advisers, both registered and unregistered. Sometimes, tax professionals may also give advice to their clients that could be regarded as investment advice, unless they exercise due diligence and care. In today’s complex and busy world, clients expect tax professionals to advise them not only on tax planning but also on investment planning. This may result in these professionals providing investment advice and falling under the scope of Investment adviser, either directly or indirectly.

Services Provided by Tax Professionals A tax professional is broadly a person who practices in Income Tax Law (generally known as Income Tax Practitioner) and Goods and Service Tax Law (generally known as GST Practitioner, previously called a Sales Tax Practitioner).

According to section 288 of the Income Tax Act, 1961, an income tax practitioner is a person who can act as an authorized representative of an assessee before any income tax authority or the Appellate Tribunal. The income tax practitioner may be a chartered accountant, a lawyer, a person who has passed any accountancy examination, a retired government officer, or any other person prescribed by the Board. Rule 54 of the Income Tax Rules, 1962, specifies the conditions and qualifications for persons other than chartered accountants and lawyers to act as income tax practitioners.

Section 48 of the CGST Act 2017 defines the eligibility criteria and educational qualification of GST practitioners as having a graduate or postgraduate degree in commerce, banking, business administration, or business management, Chartered Accountants, Company Secretaries, Cost and Management Accountants, Advocates, retired government officials, sales tax practitioners under existing law and tax return preparers under the existing law.

In India, there are various Tax Professionals who are engaged in providing wide range of advisory services including but not limited to

 

• Business Tax Services
• Transfer Pricing
• Mergers and Acquisitions
• Valuation Services
• Data Analysis and Tax Technology Services
• Representation Before Tax Authorities
• Indirect Tax Compliance
• Personal Tax Services including Tax planning, retirement planning, estate planning and many more.
• Management Consultancy

These services are essential for individuals, businesses, and organizations to ensure compliance with tax laws and optimize their financial situations. The question of whether the tax professionals providing such advisory services are considered investment advisors and are required to be registered under the IA Regulations, is not a simple one. It is also not a one-size-fits-all answer. Before we come to any conclusion, let us first understand the difference between tax-related advice or tax planning and investment advice or financial planning.

Tax related Advice v. Investment Advice

Investment advice is often incidental to tax- related advice, either for tax planning or for structural planning. Sometimes, they coincide or overlap. Therefore, it is essential to educate the clients about the difference between tax advice and investment advice. When tax professionals do tax planning for the client to reduce the tax liability in an ethical manner, they only advise the client to invest a certain amount of money in specific assets to avail the tax benefit provided by the Government of India. However, if the tax professional advises the client to invest in particular investment products, including securities dealing, etc., they do so after analysing the client’s current financial situation and their financial goals. This falls under the domain of financial planning and is considered as investment advice as per IA Regulations.

Tax related advice and investment advice are complementary aspects of financial planning. While tax advice focuses on optimizing tax situations and ensuring compliance with tax laws, investment advice is more on growing and managing your wealth through investment strategies. Depending on the client’s financial goals and circumstances, the client may need both types of advice to create a well-rounded financial plan. However, tax advice may overlap with Investment advice in certain circumstances.

Let us take a simple example where Tax advice might overlap with Investment advice/ recommendations. Mr. A approaches a Tax Professional, Mr. B for filing of his Income Tax return and for tax planning. After verification of details and documents provided by Mr. A, it is found that tax payable for that particular financial year is very high. Then, Mr. B advises Mr. A to do a certain amount of investment say in ELSS, or Tax-free bond, Capital gains saving bond which are allowed as a deduction under Income Tax Act to reduce the tax payable substantially or to make it Nil. This is pure and pure tax planning by Mr. B in the normal course of practice. However, in this case, if Mr. A approaches Mr. B to seek an advice pertaining to some Investment in financial products or any Investment planning to achieve his specific financial goal such as Child Education, Marriage retirement planning etc. along with tax planning, then that comes under the purview of Financial planning and shall be considered as Investment Advice. Accordingly, Mr. B is required to get himself registered as an Investment Adviser.

BASL and its role in IA registration SEBI vide regulation 14 of IA Regulations, has granted recognition to BSE Administration and Supervision Limited (BASL), a subsidiary of BSE Limited (BSE) as Investment Adviser Administration and Supervisory Body (IAASB) through a circular dated June 18, 2021. [Ref. SEBI circular no. SEBI/HO/IMD/IMD-I/DOF1/P/ CIR/2021/579 dated June 18, 2021]

Accordingly, any person desirous of obtaining a certificate of registration as an IA is required to first obtain membership of BASL and then make an application for grant of certificate of registration in the format of Form A as specified in the First Schedule to the IA Regulations along with necessary supporting documents specified therein.

The process for seeking membership from BASL and registration from SEBI as an IA is specified in BASL circular no. 20220718-1 dated July 18, 2022 and is available on BASL website (https://www. bseasl.com) at “Circular » BASL Circulars”.

Exemptions form Registration as Investment Adviser

There are certain exemptions also provided by SEBI from RIA registration, subject to certain specific conditions, which are as under: –

• 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;
• Members of Institute of Company Secretaries of India (ICSI), Institute of Cost and Works Accountants of India (ICMAI), and Institute of Chartered Accountants of India (ICAI) who provide investment advice to clients, incidental to their professional services;
• Any advocate, solicitor or law firm, who provides investment advice to their clients, incidental to their legal practice;
• Insurance agents or brokers registered with IRDAI;
• Pension advisors registered with PFRDA;
• Mutual fund distributors registered with AMFI who can provide basic advice to client’s incidental to distribution activity;
• Any stockbroker or Portfolio manager, Merchant banker registered with the SEBI;
• Fund manager of Mutual fund scheme;
• Any fund manager, by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with the Board;
• Any person who provides investment advice exclusively to foreign clients.

SEBI has granted exemption from registration to certain categories of professionals – CAs, CSs, CMAs and Advocates who provide investment advice to clients incidental to their professional or legal practice. SEBI has clarified through a FAQ that such classes of professionals have been exempted only to the extent investment advice is incidental to their respective profession. Hence any investment advisory services provided by specified professional which is not incidental to their respective practice shall require the said professional or firm of professional rendering the service to seek registration from SEBI under Regulation 3 of the SEBI (Investment Advisers) Regulations, 2013.

ICAI Code of Conduct v. Investor Adviser Definitions

As mentioned earlier, tax professionals like Chartered Accountants who give investment advice to their clients that is incidental to their professional services are exempted from seeking registration under the IA Regulations. However, if they provide investment advisory services in securities as an activity which is not incidental to their main activity, then they need to register as an IA.

The ICAI’s Code of Ethics and Professional Conduct outlines the fundamental principles and rules that members must adhere to in their professional activities. These principles include integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

If a Chartered Accountant is providing investment advice, they must ensure that their conduct aligns with these ethical principles. They should act with integrity, providing accurate and unbiased advice to their clients. They should also maintain confidentiality regarding client information and act professionally at all times. The same principles are also stated in the Code of Conduct of the Third Schedule of IA Regulations.

Compliance requirements as per SEBI (IA) Regulations

Chapter III of SEBI IA Regulations constitutes the provisions to be complied with by RIA.

Some of the important provisions are provided as under: –

• Certification and Qualification requirements at all the times (Reg. 7)
• General Obligations and Responsibilities (Reg. 15)
• Risk Profiling of the Client (Reg. 16)
• Suitability of the advice given (Reg. 17)
• Disclosure to Clients (Reg. 18)
• Maintenance of Records (Reg. 19)
• Redressal of client grievances (Reg. 21)
• Client level segregation of advisory and distribution activities (Reg. 22)
• Implementation of advice or execution (Reg. 22A)

Challenges for Tax Professionals in meeting Compliance Obligations under IA Regulations

Tax professionals who also provide investment advisory services may face several challenges when it comes to meeting compliance with IA Regulations issued by SEBI. These challenges can include:

• Dual Regulatory Compliance: – Tax Professionals who provide investment advice may need to comply with both the regulations of their respective tax or accounting profession’s governing body (e.g., ICAI for CAs) and SEBI’s Investor Adviser Regulations.
• Registration and Documentation: – Investment advisers need to register with SEBI and maintain proper documentation of their advisory activities.
• Conflict of Interest: – Tax Professionals need to ensure that their advice is not influenced by potential conflicts, such as receiving fees or commissions from financial products they recommend.

• Disclosure Requirements: – IA Regulations mandate clear and comprehensive disclosure of fees, charges, and conflicts of interest in a transparent manner.

• Client Onboarding and Risk Profiling: – Establishing a robust client onboarding process and risk profiling is essential for compliance.

• Client Suitability: – Tax Professionals must assess and ensure that investment recommendations are suitable for their clients’ financial goals and risk tolerance, as required by IA regulations.

• Fiduciary Responsibility: – Investment advisers have a fiduciary duty to act in the best interests of their clients.

• Regulatory Changes: – Tax professionals must be proactive in monitoring and adapting to evolving regulatory requirements.

• Continuous Education: – Tax professionals may need to invest time and resources in acquiring the necessary knowledge and skills related to investment advisory services. Continuous education and training are essential to stay competent in this field.

• Compliance Costs: – Complying with regulatory requirements, such as registration fees and ongoing compliance costs, can impact the profitability of a tax professional’s investment advisory practice.

• Enforcement Actions: – Failure to comply with SEBI regulations can lead to enforcement actions, including fines and suspension or revocation of registration. Tax professionals need to be aware of the consequences of non-compliance.

Potential benefits of Complying with Investment Adviser Regulations

Complying with IA Regulations, as those issued by SEBI, can provide several benefits to individuals and entities providing investment advisory services. These regulations are designed to protect the interests of investors and ensure the integrity of the financial advisory industry. Here are some of the benefits of complying with these regulations.

• Enhanced Investor Trust and Confidence:

  – Investors are more likely to trust and have confidence in advisers who adhere to regulatory standards, which can lead to stronger client relationships.

• Access to a Broader Client Base: – Compliance with regulations can open doors to a broader client base, including institutional investors and high-net-worth individuals who may require advisers to meet regulatory standards.
• Client Satisfaction: – Clients are more likely to be satisfied with advisers who follow clear and transparent processes, provide suitable advice, and communicate effectively.
• Professional Development: – Regulatory compliance often requires ongoing education and professional development. This helps advisers stay updated with industry trends, best practices, and changes in regulations, ultimately benefiting their clients.
• Legal and Regulatory Compliance: – Compliance with IA Regulations reduces the risk of legal actions, penalties, or regulatory sanctions for non-compliance.
• Professional Credibility and Competitive Advantage: – Clients may choose advisers who are registered and compliant over those who are not, as it provides an extra layer of assurance regarding the quality of service.

• Investor Protection: – Regulatory compliance is designed to protect investors from fraudulent or unethical practices. It ensures that advisers provide suitable and transparent investment advice based on clients’ needs and risk profile.

• Improved Risk Management: – Compliance requirements often include risk assessment and management procedures. Investment advisers who follow these guidelines are better equipped to identify, assess, and mitigate potential risks in their advisory services.

• Market Integrity: – By adhering to ethical and regulatory standards, investment advisers play a role in maintaining market stability and fairness.

• Reduced Reputational Risk: – Compliance helps mitigate reputational risks associated with unethical or fraudulent behaviour. A tarnished reputation can be challenging to recover from and may result in the loss of clients and business opportunities.

Thus, complying with IA Regulations offers numerous advantages, including building trust with clients, ensuring legal compliance, protecting investors, and enhancing an adviser’s professional standing. While compliance may require effort and resources, the long-term benefits often outweigh the associated costs and contribute to a sustainable and reputable advisory practice.

Disclosure by Tax Professionals of Potential Conflicts when providing investment advice

Disclosures of potential conflicts of interest are a fundamental component of ethical and regulatory requirements when tax professionals provide investment advice. These disclosures are essential to ensure transparency, protect the interests of clients, and maintain the integrity of the advisory relationship. Here are key considerations regarding the disclosure of potential conflicts:

• Timely and Clear Disclosure
• Written Disclosure
• Nature of Conflicts
• Client Consent
• Record Keeping
• Regular review
• Regulatory requirements
• Third Party Relationships

Case Studies and Examples

A. An Advocate or a Chartered Accountant rendering service of advising the client with the fair price for a strategic acquisition of a listed company. Whether this will be treated as an investment advisory service incidental to the respective profession?

• This service is incidental to their respective profession and hence, covered by exemption provided U/ Reg. 4

B. As per Reg. 4 of SEBI (IA) Regulations, if any Professional is exempt from registration, then can they provide investment advisory services to their clients without being registered as RIA?

• Exemption U / Reg. 4 is only provided when professionals are providing investment advice to their clients as a part of their regular professional services. If these professionals engage in the business of offering investment advisory services and this activity is not merely incidental to their primary professional role, then they are indeed obligated to seek registration as an investment adviser from SEBI. [SEBI Order against Ms. Archana Matta (PAN BECPS4207N) In the Matter of Unregistered Investment Advisory Services Dated September 27, 2018].

C. A CA is advising client for Retirement planning through investment in equities/ mutual funds – Let us examine the following issues:

1. Whether this will be treated as an investment advice incidental to the professional services of CA?

• According to Section 2(2) (iv) of the Chartered Accountants Act, 1949, the Council permits a Chartered Accountant in practice to offer various “Management Consultancy and other Services”, including ‘Investment Counselling in securities’ (Clause (xx) – Para 2.2.3 of Page 11 of the Code of Ethics – Volume II (Revised 2020 edition) published by ICAI). As per clause (xx), the investment advisory services in the above example are related to the professional service of a Chartered Accountant. One may argue that a member of the specified profession can perform only those activities that have been approved by their regulatory body and therefore, any activity done by the specified professional is normally considered to be relevant to or incidental to their professional services and hence covered by exemption provided under SEBI IA Regulation. If such interpretation is accepted, then such professionals may not be required to register with SEBI at all. This needs to be examined based on the facts and circumstances of each case. However, it is advisable to have harmonious interpretation of prevalent laws.

2. Whether a Chartered Accountant in Practice would be considered as indulging in other activity not permitted to members in Full-time Practice and in violation of the Code of Ethics, if he registers with SEBI as Investment Adviser?

• – If it is concluded that the investment advisory service(s) provided by the Chartered Accountant (or any other specified professional) is not incidental to their professional services, the member will have to register with SEBI as Investment Advisor. In the said scenario, the professional/ regulatory body may consider it to be a case of a member indulging in other activity not permitted to members in Full-time Practice and may initiate disciplinary proceedings against the member. A similar analogy could be of a specified professional enrolling with a Life/ General Insurance Company as an Insurance agent. The Ethical Standards Board (ESB) of ICAI in May 2022 has opined that members in practice are permitted to register as Investment Advisor with SEBI. Similarly, ESB of ICAI in May 2017 has permitted a CA in practice to register with SEBI as Equity Research Analyst subject to certain restrictions. This is an emerging concept and can be concluded only upon necessary clarification from Regulatory bodies of other professions.

 

3. Whether the exemption from registration for rendering Investment advisory service incidental to the professional service is available to Firm?

• Regulation 4 of SEBI IA Regulation provides for a list of persons exempted from seeking registration U/Reg 3. Clause (e) provides exemption to – “Any advocate, solicitor or law firm……..” while clause (f) refers to members of ICAI, ICSI, ICMAI and

  ASI and hence, it may lead to an interpretation that an exemption in case of Advocate is for individual as well as the firm while in case of other professional(s) the exemption is only for the member. This may not be the spirit of the law but, one would have to wait for clarification from SEBI in this matter.

4. Whether Tax professionals other than Specified Professionals (CA, CS, CMA and Advocate) can claim exemption if they provide tax advisory or incidental services to their clients?

• Sec. 288(2) read with Rule 54 of the Income Tax Act and Sec. 48 of the CGST Act allow various categories of person(s) to practice as tax professionals. professionals (ITP/STP). Reg. 4 of SEBI IA Regulation exempts CA (Clause-f) and Advocate (Clause-e) from seeking registration U/Reg 3. However, other classes of tax professionals who provide investment advice are not exempted and may have to register with SEBI as RIA for providing any tax advisory and incidental services related to securities as defined in Sec 2(h) of the Securities Contract Regulation Act and are considered as investment advice as per IA Regulations. SEBI may have exempted CAs and Advocates as they are bound by the code of ethics of their regulatory body vis- à-vis other categories of tax professionals.

Conclusion

Getting a SEBI RIA license has several benefits. Investors also get quality services from RIAs who have the qualification, certification and experience required by the IA regulations. Moreover, RIAs do risk profiling and check the suitability of the investment advice as per SEBI guidelines, which helps investors achieve their investment goals. The RIAs act in a fiduciary capacity towards their clients and disclose all the conflicts of interest as they arise. Furthermore, the execution and investment advisory services are separated to reduce conflict of interest. This brings transparency during the investment advice process. Therefore, it is advisable for tax professionals to register with SEBI if they provide investment advisory services that fall under the scope of investment advice as per IA Regulations and if their professional regulatory body permits such activity. Investors should also seek advice from SEBI registered RIAs only. Tax professionals who comply with these regulations and provide high-quality financial advisory services can gain the trust and confidence of their clients in the long run. However, they will need to plan carefully and adhere to the highest ethical standards to deal with the complexities of regulatory compliance and increased competition. 

In conclusion, whether an income tax practitioner providing investment advice to clients is required to be registered with SEBI as an investment advisor depends on various factors such as the nature and scope of the services offered, the fee or consideration charged, and the exemptions available under the SEBI regulations. It is advisable for income tax practitioners to carefully evaluate their activities and consult an expert for his professional advice if they have any doubts regarding their regulatory obligations

References

• Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 [Last amended on July 04, 2023].
•  Frequently Asked Questions (FAQS) On SEBI Registered Investment Advisers [Last amended on August 07, 2023].
•  Master Circular for Investment Advisers dated July 05, 2023.
•  ICAI Code of Ethics (Revised 2020).
• Opinion of Ethical Standards Board of ICAI – June 2022 Edition

Disclaimer: – ‘The material is being posted for educational/informational purposes only’. The views expressed here shall not be treated as an opinion and shall not be used / copied or reproduced. If anyone acts on it then it will be his / her sole responsibility for any loss / damage caused due to the same.