Introduction
The Securities and Exchange Board of India (‘SEBI’) issued a circular[i] (‘Circular’) under s. 11(1) of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’), read with reg. 36 of the SEBI (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’), reg. 50 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (‘SECC Regulations’), and reg. 96 of the SEBI (Depositories and Participants) Regulations, 2018 (‘DP Regulations’). The Circular provides clarifications regarding the association of persons regulated by SEBI with entities engaged in prohibited activities.
The Circular aims to protect the interests of investors engaged in the securities market, maintain transparency, promote the development, and regulate the securities market.
Background and Key Regulatory Amendments
SEBI introduced amendments through the aforementioned regulations, which were published in the Official Gazette on 29.08.2024. The primary objective of these amendments is to regulate the association of SEBI-regulated persons, Market Infrastructure Institutions (‘MIIs’) (Stock Exchanges, Clearing Corporations, and Depositories), and their agents with persons engaged in certain prohibited activities.
Prohibited Association: The Circular mandates that persons regulated by SEBI, MIIs, and their agents must not have any direct or indirect association with another person engaged in prohibited activities, as per reg. 16A of the Intermediaries Regulations, reg. 44B of the SECC Regulations, and reg. 82B of the DP Regulations.
Prohibited Activities Include:
i. Providing investment advice or recommendations relating to securities unless the person is registered with or expressly permitted by SEBI to offer such services.
ii. Making explicit or implicit claims regarding returns or performance on securities without SEBI authorization.
Investor Education Exception: The Circular clarifies that entities solely engaged in investor education are exempted from being classified under ‘prohibited persons’, provided they do not engage in unauthorized advisory activities. These entities must not use market price data from the preceding three months to imply future performance or recommend securities in any manner (e.g., via speeches, videos, or digital content).
Key Clarifications by SEBI
The Circular provides further clarifications regarding the association of SEBI-regulated persons, MIIs, and their agents with other entities for compliance purposes:
Definition of ‘Persons Regulated by SEBI’
The term ‘persons regulated by SEBI’ includes:
Entities registered under s. 12 of the SEBI Act.
Asset management companies (‘AMCs’) of mutual funds.
Investment managers of alternative investment funds (‘AIFs’) and infrastructure investment trusts.
Managers of real estate investment trusts.
Definition of ‘Agent’
An agent is defined under s. 182 of the Indian Contract Act, 1872, as a person employed to act or represent another entity in dealings with third parties.
Examples include employees, mutual fund distributors, authorized persons of stockbrokers, and portfolio management service (PMS) distributors.
Scope of ‘Association’
The Circular defines ‘association’ to include:
Financial transactions involving money or money’s worth.
Client referrals.
Interaction of IT systems.
Other collaborative arrangements of a similar nature.
Responsibility of SEBI-Regulated Entities
SEBI-regulated entities must ensure that their associates or agents do not engage in prohibited activities.
Permissible Activities
SEBI clarified that normal business transactions (e.g., opening demat or trading accounts) do not constitute a prohibited association unless they facilitate or enable unauthorized activities.
SEBI-regulated entities may collaborate for branding, marketing, and promotional activities, provided the associated entity does not engage in unauthorized investment advisory services.
Enforcement and Penalties
The Circular outlines penalties for violations of its provisions:
Violations of the Intermediaries Regulations (reg, 16A) and DP Regulations (reg. 82B):
SEBI has the power under reg. 16B of the Intermediaries Regulations and reg. 82C of the DP Regulations to take action, which may result in:
Inquiries and adjudication proceedings.
Imposition of penalties under s. 11B of the SEBI Act.
Violations of the SECC Regulations (reg. 44B):
SEBI may take action under reg. 44C and reg. 49 of the SECC Regulations, leading to:
Adjudications and financial penalties.
Other regulatory actions under s. 11B of the SEBI Act.
Conclusion
Through these regulatory updates, SEBI has reinforced its commitment to investor protection and market integrity. The clarifications provided in this Circular significantly enhance compliance obligations for SEBI-regulated persons, MIIs, and their agents.
The explicit prohibition on direct and indirect associations with unregistered investment advisors, misleading financial promoters, and unauthorized financial influencers aims to prevent misleading investment claims.
By broadening the definition of ‘association’ to cover financial transactions, referrals, IT system interactions, and promotional activities, SEBI has effectively closed regulatory loopholes that allowed informal advisory networks to thrive.
The regulations are expected to curb the growing influence of unregulated financial influencers and investment tip providers, ensuring that only SEBI-registered professionals engage in investment advisory services.
While these reforms enhance transparency and investor confidence, they may also increase compliance costs and operational challenges for stockbrokers, asset managers, and financial service providers. Additionally, the distinction between investor education and unauthorized advice remains a grey area, necessitating further guidance from SEBI to prevent regulatory conflicts.
End Note
[i] Circular No. SEBI/HO/MIRSD/ MIRSD-PoD-1/P/CIR/2025/11 dated 29.01.2025.
Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.