This is an unusual blog - in that it comes in-between month ends. We write this blog since SEBI has issued a circular dated 23-Sep-2020 with wide ramifications for Investment Advisers. The purpose of the circular seems to further reduce the obfuscation that currently exists between “advising” upon a product for a fee as we do versus “selling” a product for a commission as distributors do. We congratulate SEBI on taking a further step in tightening the noose around commission based distribution. As we are fee only advisers and since we do not have any distribution arm (where commissions can be collected), this circular has no impact on our operations in that sense. While the circular is positive on most aspects for us – there are two areas where we are significantly impacted. While we urge our clients to read the circular in all its details, we direct your attention specifically to two points mentioned in the circular :

Point 2(iii) on page 3 on Fees:
Contrary to our representations to SEBI to avoid micromanaging fee structures of Investment Advisers, SEBI has gone ahead and put in very specific rules around how clients can be charged fees. Reading of point 2(iii) in the circular means that Investment Advisers can either charge clients an absolute fixed fee that cannot exceed 1.25 lakh Rs per client or it can charge clients a maximum of 2.5% of AUA (Assets under Advise). In other words Investment Advisers can charge fees in only one of the these modes. This also means that Investment Advisers are explicitly barred from charging performance fees. In an effort to charge our clients fees only for performance above a benchmark, Aroha Capital had structured its incentives such that we gain only when our clients gain above a specific benchmark. This fee structure however as it stands today violates point 2(iii) of the said circular. As much as we oppose this specific point, and believe that this action by SEBI is myopic and not in the best interests of clients, we are bound by rules and regulations laid down by the regulator. Given this development, we will go back to the drawing board and do a hard re-think on how we want to move forward on the fees structure and revert to you. Kindly await further communication from us in this regard.

Annexure-A point 14 on page 10 disallowing seeking authorization:
SEBI in an earlier amendment to the regulations dated 03-Jul-20, in clause 22A, explicitly allowed Investment Advisers to undertake implementation of advice without a commission/fee – for example placing orders for Direct Mutual Funds or placing orders for shares etc. We were delighted with the insertion of this clause as it explicitly allowed Investment Advisers to practically implement our advice (of-course without commissions/extra fees). Since our inception, we have been having a specific clause in our Investment Advise Agreement with clients, that the client’s account would be used to place orders and the act of logging in to the client account would be construed as an approval from the client for placing the specific orders. We inserted this clause, to ensure that the implementation of our advice was undertaken in a seamless manner without having the client to login and place these order by herself. This however seems to be explicitly disallowed by SEBI in point 14 of Annexure-A of this latest circular. The reading of point 14 in Annexure-A says that the Investment Adviser shall not seek authorizations from the client for implementation of investment advice. To be in compliance of this new clause, we will now have to implement new procedures, processes and protocols – which we hope to clarify in the weeks ahead. Though this makes our work more cumbersome, we believe that this clause creates a more robust architecture which is in client interests.

We will reach out to all our clients and discuss these points in depth and clarify your doubts. The above two developments will require us to come out with a new Investment Advise Agreement with each one of our clients. The new Investment Advise Agreement will have to be in compliance with this new circular. Dear clients, we seek your cooperation and understanding as we move forward on these matters.