Madhabi Puri Buch on the "good guys and bad guys"

Oct 05, 2023

At a conference held in Mumbai yesterday, Madhabi Puri Buch interacted with the Association of Registered Investment Advisers (ARIA) in a very candid way.

The chairperson of the Securities and Exchange Board of India (SEBI) reiterated that the role of the regulator is to bring and maintain stability in a very dynamic environment.

Here are some of her insights (slightly paraphrased for reading) on the regulatory architecture.

There is no one-size-fits-all when it comes to regulation.

Distinct segments in the market must be regulated differently. We are open and willing to look at a segmented approach to regulation. And thanks to technology that is now available, the regulator possesses the ability to conduct supervision and compliance monitoring at a segmented level.

When we draft regulations, it is not as simple and cut-and- dried as it looks from the outside. When you introduce flexibility, there are enough or more people who look to play around with it. Consequently, we have to build adequate risk mitigation measures to ensure that it does not happen.

The devil is in the detail. Nobody disagrees conceptually or in principle. The problem comes in implementation.

The good guys end up over engineering the compliance, the bad guys end up not caring at all. The good guys are watching the bad guys take the market share, and can do nothing about it because their governance does not permit them to follow certain practices.

This is not a level playing field. Hence, it is important that there are industry standards.

This is best done by the industry in consultation with SEBI. We want to be in touch with the ground realities and cannot be making regulations sitting in an ivory tower.

(Some examples of circumvention of the law cited)

  • Investment advisers are required to register with the new first level regulator; 35% of investment advisers have still not registered. This is a basic requirement of your profession and livelihood.
  • I used to hear that in the secondary market, you don’t just trade shares, you trade profit and loss, you trade long-term capital gains. Now I hear that that there are investment adviser registrations for rent.
  • Complaints come in saying that they gave their user ID and password to their adviser and were unaware that he needs permission before he buys or sells. They just handed over their credentials. This is illegal PMS being practised.

    We have professionals who ask us why we are not permitting a profit-sharing model for investment advisory? I don’t understand the question. Advisory means you give advice and it is the investor’s prerogative to act on it or ignore it. If you give advice and manage the portfolio, and want a share in profits, that is the PMS model, not the advisory model.

  • One direct platform essentially ran mutual fund distribution with advertising revenues which was nothing but commission. Month on month, the advertising revenue of that platform matched perfectly with the business facilitated.

Fact vs. Fake is crucial for the regulator as well as the investor.

When people make claims, what is fact and what is fake?

Algo players will claim 300% per annum. On the face of it, do they really think that the regulator is stupid? When we question further, it is apparent that they have done a retrofit of the data, and on the basis of that, they give that figure.

Finfluencer videos claim that their student has made Rs 15 crore in the past one year or yesterday made Rs 5 lakh and this happened and that happened. Do you believe the claims on social media?

Investment advisers point out that that by not allowing them to make a claim, they cannot sell their services to anyone.

Our consultation paper on Performance Validation Agency is a radical concept for an institutional mechanism to validate your claims. The modalities and how it is to be done will require a lot of work. But when there is a genuine need in the market, it is our objective to address that need.

I hear again and again, that investors do not pay for advice, but pay for performance.

I have not met a single person who has come to me and said that my client pays me for the advice that I give him, and nothing more.

I have one question to ask everyone who says that they are fee-only advisers: Tell me the source of your income. Fee-only is giving advice on what?

One says that they advice their high networth clients also on EB-5 visas. This investment is risky and a substantial amount. The money is locked up for years and the chances of getting it back are virtually zero. So this is a RIA, giving advice on a product that is highly risky and not regulated.

Another may say that he does not give trading calls. But, his wife or relative or associate does.

Or, a cut for all the trading done via a particular broker.

(This was where she asked the members attending for a show of hands)

  • How many of you have income coming in from regulated products of the client?
  • Referral income from anyone else?
  • Profit share from anyone?
  • Other product income?
  • Cross-sell?
  • Up-sell?
  • I got them a property?

Most importantly, Madhabi Puri Buch said that it is a failure that the number of investment advisers is so few. And to make the numbers grow, requested the participants to bring to the regulator's attention the malpractices and circumvention of the law, so that they can craft solutions that will enable the good guys to win.

"We want one million advisers, but the good guys."

The above is just a snippet. Video recordings of various sections of her talk can be accessed here:

BQ Prime


Economic Times


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