Key Provisions of Various Other Acts Applicable to Investment Advisory Profession

The Investment Adviser role is primarily governed by the SEBI (Investment Advisers) Regulations, 2013, but the Indian legal framework is layered. Acts such as the Companies Act, 2013; the Securities Contracts (Regulation) Act, 1956 (SCRA); the RBI Act, 1934; the Insurance Regulatory and Development Authority (IRDA) Act, 2000; and the Prevention of Money‑Laundering Act, 2002 (PMLA) impose additional duties on IAs.

Each of these statutes addresses a specific facet of the financial system – corporate governance, market conduct, banking supervision, insurance distribution, and anti‑money‑laundering (AML) respectively. When an IA recommends a product that falls under any of these domains, the adviser must ensure compliance with the relevant provisions.

For the NISM exam, questions often combine two or more Acts to test your ability to spot the correct regulatory requirement. Ignoring any of these Acts can lead to a wrong answer, especially when the question mentions “client onboarding” or “risk profiling”.

• Remember: SEBI is the apex regulator for securities, but other regulators have jurisdiction over the underlying entities.
• Cross‑checking the relevant Act prevents penalties and protects client interests.

The Companies Act, 2013 governs the incorporation, management, and disclosure requirements of companies that issue securities or manage mutual funds. Section 129 mandates a financial statement with a true and fair view, which IAs must verify before recommending equity‑linked products.

Section 188 limits related‑party transactions. If an IA is also a director or has a material interest in a company, the adviser must disclose this to the client and obtain written consent, otherwise the recommendation may be deemed a conflict of interest.

For the exam, remember that the Companies Act enforces board‑level approvals for any material investment advice that could affect a listed entity’s share price. Failure to obtain such approval can attract penalties under Section 447.

• Key compliance step – check the company’s annual return and board resolutions before advising.
• Exam tip – questions mentioning “director‑shareholder conflict” usually point to Section 188.

SCRA regulates the trading of securities on recognized stock exchanges. Section 4 defines a "contract of securities" and Section 15 prescribes the registration of brokers. An IA who also acts as a broker must ensure the brokerage firm is registered under SCRA, otherwise the advisory activity is deemed illegal.

Section 27 of SCRA empowers the regulator to prohibit fraudulent or manipulative practices. IAs must therefore maintain a record of client instructions and avoid any activity that could be construed as market manipulation, such as recommending a stock solely to boost its price.

In NISM questions, look for clues like “broker‑dealer registration” or “prohibited transactions”. The correct answer will reference SCRA compliance, not just SEBI regulations.

• Remember – SCRA applies to the *execution* of trades, while SEBI regulations cover the *advice*.
• Typical exam mistake: treating SCRA as optional for non‑broker IAs.

The RBI Act governs banking entities, non‑banking financial companies (NBFCs), and the issuance of certain debt instruments. Section 22(1) requires any entity dealing in foreign exchange to be authorized by the RBI. If an IA recommends foreign‑currency‑linked products, the adviser must verify the client’s eligibility under RBI’s FEMA guidelines.

Section 45‑H of the RBI Act empowers the RBI to issue directions to NBFCs regarding capital adequacy. IAs working with NBFC‑based mutual funds need to ensure that the NBFC complies with the RBI’s net‑worth requirement of at least Rs. 2 crore, which indirectly safeguards client investments.

Exam‑wise, any question that mentions “foreign exchange advisory” or “NBFC mutual fund” will test your knowledge of RBI‑specific thresholds and licensing.

• Key check – confirm the NBFC’s RBI registration certificate before recommending its products.
• Common error – assuming RBI rules apply only to banks, not to NBFCs.

The Insurance Regulatory and Development Authority (IRDA) Act regulates the distribution of insurance products. Section 12 mandates that any person acting as an insurance advisor must obtain a licence from IRDA. For IAs who also provide insurance advice, dual registration with SEBI and IRDA is mandatory.

Section 33 requires a "fit and proper" assessment of the advisor, similar to SEBI’s net‑worth criteria. The advisor must maintain a minimum net worth of Rs. 5 lakh for life‑insurance advisory, which aligns with the SEBI threshold for investment advisory.

When the exam asks about “combined advisory services”, the correct answer will highlight the need for both SEBI and IRDA licences, as well as adherence to the respective code of conduct.

• Remember – the IRDA code of conduct includes a separate grievance redressal mechanism.
• Exam tip – look for wording like “insurance‑linked investment” to trigger IRDA relevance.

PMLA imposes a duty on financial intermediaries to verify the identity of clients (KYC) and to report suspicious transactions to the Financial Intelligence Unit‑India (FIU‑India). Section 12 mandates "customer due diligence" (CDD) procedures, which IAs must embed in their onboarding workflow.

Section 13 requires the maintenance of records for a minimum of five years. Failure to retain transaction logs can lead to penal action, including imprisonment. Therefore, IAs need a robust record‑keeping system that captures advice given, client risk profile, and transaction details.

In NISM questions, any scenario describing "large cash transactions" or "unusual portfolio turnover" will test your understanding of PMLA reporting thresholds (currently Rs. 10 lakh for cash transactions).

• Key point – PMLA compliance is independent of SEBI; both must be satisfied concurrently.
• Common mistake – assuming SEBI’s KYC suffices for AML; PMLA adds extra layers.