SEBI Issues Draft Circular Clarifying the Provisions on Prohibited Activities and Associations

The Securities and Exchange Board of India (SEBI) has floated a consultation paper on a draft circular providing clarification on provisions regulating associations between market intermediaries, market infrastructure institutions (MIIs), their agents, and persons engaged in prohibited activities as specified under SEBI (Intermediaries) Amendment Regulations, 2024, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2024 and SEBI (Depositories and Participants) Regulations, 2018 (amended in 2024). The regulations were published in August this year, and they prohibit intermediaries and MIIs such as stock exchanges, clearing corporations, and depositories from associating with entities providing unregistered securities advice and performance claims. These provisions needed more clarification, and hence this draft circular has been issued. 

In October this year, SEBI had also issued a circular directing ‘persons regulated by the board’ (including recognised stock exchanges, clearing corporations, and depositories) and their agents to cut ties with unregistered financial advisors providing recommendations or making claims related to securities within three months.

The draft circular provides detailed FAQs to ensure strict compliance. It defines the term “association” as any engagement involving monetary transactions, client referrals, or technological interactions. It further seeks to prevent unregistered entities from offering investment advice and making unauthorized return claims. It also provides that associations with organizations dedicated exclusively to investor education are permitted, as long as they refrain from providing unauthorized advice or making claims.

As provided in the previous circular, the draft also clarifies that regulated entities must terminate existing contracts with prohibited entities by January 21, 2025. Failure to comply after this date may lead to severe penalties, including suspension of registration, debarment, or monetary fines for violators. Additionally, any indirect associations through advertising or branding could link regulated entities to prohibited entities.

The public comments/suggestions to the draft circular are invited to be submitted by the stakeholders until December 27, 2024 through the link.