Investment advice
Also written Investment advice (SEBI definition)
Advice on buying, selling or dealing in securities or investment products, including financial planning. Only a SEBI-registered Investment Adviser may give it for a fee; mass-media commentary is excluded.
In plain language
Anyone can tell you what they think about a share. What the law cares about is someone who charges you for telling you what to buy, sell or hold. That is investment advice, and in India the person giving it must be registered with SEBI.
The definition is wide on purpose. It covers advice given in writing, by phone or by any other means, and it includes financial planning. But it leaves out one thing: views published in a newspaper, a magazine, or on TV or the internet for the general public.
The practical lesson for an investor: before you pay anyone for tips, check that they are on SEBI's list.
How it works
From Chapter 11 and the securities-market booklet's Annexure III, under the SEBI (Investment Advisers) Regulations, 2013 (the booklets cite them as last amended on July 3, 2020):
"Investment advice" means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on a portfolio containing them, whether written, oral (verbal) or through any other means, for the benefit of the client, and shall include financial planning.
The proviso: advice given through newspapers, magazines, or any electronic, broadcasting or telecommunications medium that is widely available to the public is not investment advice for these regulations.
"Investment Adviser" means any person who, for consideration, is in the business of providing investment advice, including anyone who holds himself out as an investment adviser, by whatever name called.
Rules for the adviser: get registration from SEBI and follow the Code of Conduct. It is illegal to act as an Investment Adviser without SEBI registration. Advisers must limit themselves to giving advice and must not handle cash or securities.
Malpractices reported to SEBI: assured returns; exorbitant fees with false promises; mis-selling against the client's risk profile; trading on behalf of clients; switching clients to riskier services without consent; poor service; refund issues.
Beyond the booklet: the regulations have been amended again since 2020; check the current text on sebi.gov.in.
A worked example
Amounts are illustrative.
Three people give Harish, a shop owner in Vadodara, views on shares in the same week:
- A business channel anchor says a banking stock looks cheap. It is broadcast to the public, so under the proviso it is not investment advice for the regulations.
- A Telegram group charges him Rs 15,000 a quarter for "sure-shot" calls and promises 3% a month. It is advice for consideration. The group is not on SEBI's list, so it is acting illegally, and the assured return is itself a listed malpractice.
- A SEBI-registered Investment Adviser asks him to complete a risk profile, gives him a written fee agreement for Rs 10,000 a year, and asks him to pay by bank transfer.
The Telegram group then offers to "manage his trades" if he shares his login. That is trading on behalf of the client, another listed malpractice, and an adviser should not handle cash or securities at all. Harish pays only the registered adviser, by bank transfer, and keeps the signed receipt.
Why NISM asks about it
Chapter 11 (Caution against Ponzi Schemes and Unregistered Investment Advisers) gives the definitions, the media proviso, the list of malpractices and the Do's and Don'ts. The securities-market booklet repeats them in Annexure III. Expect: does financial planning count (yes), does a newspaper column count (no), can an adviser hold your money (no), and is acting without registration illegal (yes).
Common exam traps
- Financial planning is included in the definition of investment advice.
- Mass-media advice widely available to the public is excluded. A private paid group is not "widely available to the public".
- "For consideration" makes someone an Investment Adviser; the name they use does not matter ("by whatever name called").
- Advisers must not handle cash or securities. Pay only the advisory fee, through banking channels.
- Assured returns are a red flag, listed as a malpractice.
- Ask for your risk profiling before accepting advice.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Investment adviserAny person who, for consideration, is in the business of giving investment advice, including anyone holding out as one — but not an AMFI-registered distributor whose advice is incidental to distribution.
- Advisory feeThe fee paid to a SEBI-registered Investment Adviser for advice, payable only through banking channels with a signed receipt — never in cash, and never as money handed over for the adviser to invest.
- Assured returnsA promise of high or guaranteed returns used by Ponzi schemes and unregistered advisers to lure investors — a red flag the booklet tells investors to report to SEBI.
- Risk profilingEstablishing how much risk an investor should carry by weighing three separate things — the need to take risk, the financial ability to take it, and the psychological willingness to bear it.
- Ponzi schemeA fraud that pays earlier investors out of their own money or new investors' money, not real profits. It promises high or unusually steady returns and collapses when new money slows.
- Securities and Exchange Board of IndiaThe statutory regulator of India's securities market, set up under the SEBI Act, 1992, to protect investors and to develop and regulate the market. It registers brokers, DPs and mutual funds.
- Trading callsIntraday, ultra-short and non-personalised buy/sell recommendations — defined so precisely that SEBI's rules say they do not count as investment advice at all.
- Investment Adviser Administration and Supervisory BodyA body recognised by SEBI under Regulation 14 of the IA Regulations to administer and supervise investment advisers; no one may act as an investment adviser without enlisting with it. The first was BASL.
- Asset under adviceThe aggregate net value of securities on which an investment adviser has given advice, whether or not the adviser, the client or another provider implements it — the base for AUA-mode advisory fees.
- Hot tipsUnsolicited buy or sell recommendations, often from someone trying to offload unmarketable securities; disseminating them is an illegal activity the booklet says should be reported to SEBI.
- Unlicensed sellersA Ponzi-scheme warning sign — most such schemes are run by individuals or firms not licensed or registered under state securities laws, even though the law requires investment professionals to be.