Sebi: Sebi seeks public comments on draft circular to regulate association with prohibited entities

Sebi on Friday issued a draft circular that seeks to clarify and regulate associations between market intermediaries, market infrastructure institutions (MIIs), their agents, and entities engaged in prohibited activities. The initiative follows amendments to Sebi’s Intermediaries, Securities Contracts (Regulation), and Depositories and Participants rules earlier this year.

The amendments were effective from August this year. It aims to curb unregistered entities providing investment advice and unauthorised claims of returns.

In a consultation paper floated by Sebi, the regulator outlined provisions prohibiting intermediaries and MIIs, including stock exchanges, clearing corporations, and depositories, from associating directly or indirectly with entities offering unregistered securities advice or performance claims.

The draft circular also seeks to ensure strict compliance by defining the scope of association, responsibilities, and consequences of violations.

The paper defines “association” as any engagement involving monetary transactions, client referrals, or technological interactions. It mandated that regulated entities and their agents ensure their associates are not involved in prohibited activities, Sebi said.

Further, the markets watchdog clarified that associations with entities engaged solely in investor education are permissible, provided they strictly avoid unauthorised advice or claims.

The circular also differentiates between educational activities and advisory services, emphasising that educational content using market data must maintain a minimum three-month lag. The regulated entities are required to terminate existing contracts with prohibited entities by January 21, 2025, it added.

The regulator warned of stringent penalties, including registration suspension, debarment, or monetary penalties for violators. It also cautioned against indirect associations through advertising or branding that might link regulated entities to prohibited entities.

Stakeholders can submit feedback on the draft circular till December 27.