SEBI/HO/IMD/DF1/OW/P/2021/32411/1  – November 11, 2021

 

Queries

1. Does the creation and rebalancing of stacks (a basket of foreign securities) for the US company (which provides an online platform on Indian customers, to deal in foreign securities) based on certain predefined financial or qualitative criteria constitute “investment advice” for the purpose of SEBI Investment Adviser Regulations (ref 2(i) of IA Regulations). SVC or US company will not directly or indirectly provide any advise to customers including on the investment amounts, choice of stacks, rebalancing of stacks, financial planning, portfolio management or on buying or selling of foreign securities. Customers are free to investment in any of the stacks and or in any foreign security (ies) as per their own counsel.

 

2. SV Capital has also been appointed by the US Company to execute the agreement with the US Stock Broker identified by the US Company under which SV Capital will facilitate the purchase of foreign securities by customers through the platform by providing facilitation described to the US Stock Broker. Under the agreement, SV Capital will facilitate the account opening process of the customers with the US Stock Broker. We understand from the US Stock Broker that under the laws applicable to US Stock Broker, the US Stock Broker must enter into contractual agreements for sale of securities only with a regulated entity i.e. in the Indian Context, with either a SEBI registered investment adviser or stock broker. Given that SV Capital is a SEBI registered investment adviser, the US Company has engaged SV Capital to provide facilitation services.

Do the services provided by SV Capital to US Company to facilitate purchase of foreign secuirities i.e. securities listed on overseas stock exchanges through the platform constitute “distribution” services, given that SV Capital is not engaged by an intermediary or an issuer? (Regulation 22 3 & 22 4 of the IA Regulations)

3. Under the US Stock Broker Agreement, SV Capital will facilitate the account opening process of the customers with the US Stock Broker. In consideration for the services under the US Stock Broker Agreement, the US Stock broker will pay SV Capital a trailing commission on the brokerage charged by the US Stock Broker. Under the agreement with the US Company, for the service of creation and rebalancing of Stacks, the US Company will provide a fixed monthly retainer amount to SV Capital.

Can SV Capital receive both the fee from the US Company and from US Broker? (Regulation 15(A) and 22(3) of IA Regulations

 

Replies

In terms of queries raised above, the following may be stated:

1.1 in this regard, as per Regulation 2 (1) (l) Investment Advice means advice relating to investing in, purchasing, selling or dealing in securities or investment product, 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

1.2 Further in this regard, as per Regulation 2 (1) (m) 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

1.3 Thus for an activity to be considered under the IA regulations vis-à-vis the aforesaid definitions of Investment Adviser & Investment Adviser, the same has to be in the nature of providing IA for a consideration and includes FP

1.4 In the instant case, as per an agreement between SVC and a US Company, SVC will be required to create stacks exclusively for the US Company based on certain financial or qualitative criteria and rebalance the said stacks purchased by customers using the Platform, exclusively for the US Company on a quarterly basis. As per the submission, the customers mentioned above are Indian customers

1.5 Further, as per the agreement with the US Broker, SV Capital will be required to facilitate the purchase of foreign securities by Indian customers through the Platform by providing facilitation services to the US Stock Broker and will facilitate account opening process of the Indian customers with US Stock Broker.

1.6 In this regard, the applicant has submitted that it will not directly or indirectly, provide any advise to Indian customers. Further it is submitted that all payments for purchase is made by Indian customers directly to US Stock Brokers

1.7 Considering the submissions of the applicant, the following is observed:

(a) SVC will have agreements with US Stock Broker and not with Indian customers

(b) SVC will provide services to US Company and US Stock Broker in order to facilitate purchase of foreign securities by Indian customers

(c) SVC will only facilitate account opening process of Indian customers for US Broker but will not provide any direct service including advice wrt investment by any Indian investor

(d) SVC will not receive any consideration from any Indian Investor

(e) SVC will receive trailing monthly commission from US Broker and fixed monthly retainer from US Company

1.8 It is stated that on the basis of the submission made by SVC, the proposed services by SVC i.e., creating and rebalancing stacks for a US Company which provides online platform for customers including Indian Customers to purchase and invest in foreign securities and receiving compensation for the same in the form of commission or fixed monthly retainer fee does not appear to be an activity for providing investment advice as envisaged under IA Regulations. Consequently, the proposed services to be provided by SVC shall not come under the purview of IA Regulations. Hence in the capacity of a SEBI Registered IA, SVC cannot provide the proposed services.