Here’s a link to the consultative paper, in case you wish to go through the fine print:

https://www.sebi.gov.in/reports/reports/apr-2019/consultation-paper-on-self-regulatory-organizations-in-securities-market_42573.html

Lets go step by step

Let me take you step by step on how I came to this rather unpopular and disheartening conclusion:

Here is the clause which to my mind shuts out any distributor association including FIFA, FIAI and others:

• 3.4. Eligibility Criteria to become SRO
• 3.4.1. While SRO is required to have adequate experience (direct or indirect) in regulation, supervision, dispute resolution and investor protection, the SRO Regulations provide certain eligibility criteria which, inter alia, include the following:
• 3.4.1.1. Incorporation under Section 8 of Companies Act, 2013
• 3.4.1.2. MoA has discharging the functions of SRO as one of its main objects
• 3.4.1.3. Minimum net worth of one crore rupees
• 3.4.1.4. Adequate infrastructure
• 3.4.1.5. Professional competence, financial soundness and general reputation of fairness and integrity

If the entity or the parent sponsoring such entity is to demonstrate adequate experience in regulation, supervision and dispute resolution, how would a distributor association – which was never given such an opportunity, be able to qualify? They can qualify on all other parameters including professional competence, infrastructure, legal structure, capital etc – but they can’t show experience when they were never allowed to regulate, supervise or resolve disputes.

So who are the entities who can make such a claim? AMFI for sure – after all it has been the entity granting ARNs, supervising the conduct of due diligence audits, disbarring errant ARN holders and so on. AMFI had already created its subsidiary which was in the running for the SRO mandate in round 1 – the same entity can be revived and put forth for consideration.

How did stock exchanges come into contention?

Now how did BSE and NSE come into contention? Well, BSE and NSE have a long track record of acting as SROs for stock brokers of their respective exchanges – they have more than adequate experience in regulation, supervision and dispute resolution of stock brokers. Still, why even think of that possibility. Perhaps because SEBI seems to have explicitly thought about it – here is an extract from the paper that leads me to this conclusion:

• 4.3.1. Definition of Self Regulatory Organization
• 4.3.1.1. The definition of Self Regulatory Organization under regulation 2(1)(k) may be amended as follows:
  “Self Regulatory Organization” means an organization of intermediaries or an entity promoted by a stock exchange ,as may be recognized by the Board.”

The definition of an SRO specifically provides for an entity promoted by a stock exchange to be considered in the nomination process. So that should automatically include BSE and NSE. The wording “organization of intermediaries” is deceptive because it could therefore mean associations like FIFA and FIAI, but then the same sentence ends with “as may be recognized by the Board”. None of our distributor associations are “recognised” by SEBI in any formal capacity as yet.

AMFI still remains in play in my view as per this definition, since mutual funds are treated by SEBI as market intermediaries and therefore AMFI qualifies as an organization of intermediaries, and is recognized by SEBI.

What about FPSB?

Where does that leave FPSB – the entity that went to court in SRO 1.0 – which ultimately caused SEBI to abandon it and come up with a brand new SRO 2.0? SEBI’s consultative paper clearly provides for FPSB to also be considered, through this clause:

• 4.3.2.2.2. The said Committee may also consider the pending cases, as directed by the Hon’ble Supreme Court in its Order dated November 12, 2018, as stated in Para 2.5.

This means that the entities promoted by AMFI and FPSB in SRO 1.0 will have to be considered. The key to my mind which may tip the scales against FPSB for the MF distribution SRO is lack of relevant experience in regulation, supervision and dispute resolution. AMFI has the best shot in terms of relevant experience, stock exchanges have the next best shot in terms of a history of actually discharging SRO related responsibilities at a large scale covering large numbers of financial intermediaries.

My take on the most likely outcome – based on this consultative paper

Since SEBI has left the door open for more than one SRO (ie separate SROs for MF distribution and RIA), what appears to me as the most likely outcome is as follows:

• A race between AMFI and the two stock exchanges for the MF distribution SRO, with AMFI (or rather, its promoted entity) finally getting the nod on grounds of most relevant experience and infrastructure
• FPSB’s entity getting the nod for the SRO for investment advisors on the grounds that it is already a product agnostic body (and RIAs are required to be product agnostic) and conducts tests and awards certifications for a financial intermediation process that comes fairly close to what SEBI prescribes as processes for RIAs. Relevant experience is something FPSB can boast of when it comes to the RIA world – not so much the MF distribution world.

Where does that leave India’s prominent distributor associations including FIFA and FIAI? The consultative paper suggests a Board composition for the SRO to include 25% shareholder directors (if the MF distribution SRO is run by AMFI’s subsidiary, that would mean AMFI directors), another 25% “regulatee” directors (MF distributors) and 50% PIDs (public interest directors). 25% of the Board is what distributors can expect to represent, through which they can expect to shape the course of regulation and development of their industry.

Lets focus our response to SEBI on two clauses

Do we think this is fair? Do we think distributor associations must be included in the nomination process? We have time until April 21st to make our representations: I suggest we ask SEBI to re-examine clauses 3.4 and 4.3.1 which deal with eligibility criteria and definition of SRO.

The very phrase “Self Regulatory Organisation” includes “Self” – which means MF distributors regulating themselves under a framework laid out by the regulator. Why then create clauses that completely shut out the possibility of distributor associations ever being considered in this nomination process?

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