There is still a lot of ambiguity regarding interpretation of the SEBI (Investment Advisers) Regulations, 2013 (IA regulations).
Recently, Paytm Money Limited (Paytm) had sought clarification from SEBI on certain aspects of the IA regulations.
As a brief background, Paytm is registered with SEBI as an Investment Adviser. However, Paytm does not charge clients – neither for advisory services nor for execution services. Paytm only offers direct plans of mutual funds to the clients and hence does not receive any commissions from AMCs.
Here is the summary of the clarifications sought by Paytm:
SIGNING OF AGREEMENT:
It is clearly mentioned in the guidelines for Investment Advisers dated September 23, 2020 that:
#1 – Investment advice cannot be rendered and no fee can be charged until the client has signed the investment advisory agreement
#2 – RIA should provide a copy of signed agreement to the client
A lot of emphasis is given on the signing of the agreement. When a person signs the document, it authenticates the record. In my view, in order to keep a signed agreement on records, the client has to physically / digitally sign it.
As per Cambridge Dictionary “sign means to write your name, usually on a written or printed document, to show that you agree with its contents or have written or created it yourself.”
As an Investment Adviser, if you are keeping records of agreements which are physically signed by the client, you are in compliance with the regulations. The client can provide scanned copy of signed agreement to you.
However, given the Covid situation as well due to the operational hassles if the client is not in your town, it becomes difficult to get the agreement physically signed.
The other option is to get the agreement digitally signed. As per the Information Technology Act, 2000, electronic signatures are valid in India.
As per section 5 of the IT Act, where any law provides that information or any other matter shall be authenticated by affixing the signature or any document shall be signed or bear the signature of any person, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is authenticated by means of digital signature affixed in such manner as may be prescribed by the Central Government.
Explanation – For the purposes of this section, “signed”, with its grammatical variations and cognate expressions, shall, with reference to a person, means affixing of his hand written signature or any mark on any document and the expression “signature” shall be construed accordingly.
The IT Act has clearly mentioned the meaning of “signed”. Hence an agreement to be signed, it needs to have a handwritten signature of any mark on the document. When an electronic document is digitally signed, a mark is present on such a document.
The IT Act recognizes two types of digital signatures:
#1 – Aadhar based authentication of the document
Aadhaar eSign is issued by a Certifying Authority. Aadhaar eSign is a consent driven process where a customer has to provide its content through UIDAI received OTP. Aadhaar eSign based signatures are fully admissible in court under the Indian Evidence Act, 1872.
#2 – Affixing Digital Signature Certificate (DSC)
The Digital Signature Certificates (DSCs) are being issued by Certifying Authorities (CA) on successful verification of the identity and address credentials of the applicant.
There is one more option where the person signing the agreement is given an option to either draw the signature or affix an image of the signature. In my view, this option should also be allowed for signing the agreement. The signing process should have a mechanism for verifying the identity of signatories either through phone or through email.
The Electronic Signatures facilitated through eSign Online Electronic Signature Service are legally valid provided the eSign signature framework is operated under the provisions of Second Schedule of the Information Technology Act and Guidelines issued by the Controller of Certifying Authorities.
To reiterate, authentication of electronic records can be done by affixing the digital signatures. So to comply with the requirements of SEBI either get the agreement physically signed by the client or provide an electronic copy of the agreement to the client to digitally sign it.
All in all, the Paytm clarifications bring out a stricter view of the SEBI IA regulations. Hopefully, practicality of these guidelines will seep in and the regulator will take a view in the future accordingly.
Till then, follow the rules.
Now a day’s stock brokers who handle the money of the customers have done away with physical agreements or digital signatures. RIAs are not handling money the clients. Their advice is in discretionary nature. Client decides whether to accept the advice or not. So the business of stock brokers are more riskier than RIAs. But SEBI is allowing stock broker to do Aadhar based authentication but not the RIA. How can there be different rules for 2 intermediaries for same process? One the one side SEBI wants people to take advice and invest. But on the other hand they curtails the scalability of RIAs.
Aadhaar based signing is allowed for RIAs too. The same is mentioned in the article. What SEBI has not allowed is mere taking consent from the client and not signing the agreement.
In case of online digital signing, just aadhar based otp works or even stamping is also needed for signing the agreement
In order to be the agreement admissible in the court of law, in my view, the agreement should also be franked or stamped.