Introduction
In a move aimed at providing clarity regarding the transfer and transmission of shareholding in investment advisors (“IAs”), research analysts (“RAs”) and Know Your Client Registration Agencies (“KRAs”), the Securities and Exchange Board of India (“SEBI”) has issued circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2024/164 dated December 27, 2024 (“Circular”).
The Circular clarifies the respective scenarios wherein the transfer of shareholding among immediate relatives and transmission of shareholdings, resulting in change in control shall require the prior approval of the regulatory body.
The contents of the Circular are summarized below:
1.Unlisted body corporate intermediaries
A change in the shareholding of an unlisted body corporate intermediary will not be construed as a change in the following cases:
- Transfer of shareholding among immediate relatives, where “immediate relative” means the spouse of a person, and includes parent, brother, sister or child of such person or of their spouse; and
- Transfer of shareholding by transmission to an immediate relative or a person other than an immediate relative.
2. Proprietary firm type intermediary
For proprietary firms, the transfer or bequeathing of the business/capital by way of transmission to another person constitutes a change in legal formation or ownership. By definition, this amounts to a “change of control”. In such cases:
- The legal heir/transferee is required to obtain prior approval for such change in control from SEBI.
- Fresh registration with SEBI must be obtained in the name of the legal heir/transferee.
3. Partnership firm type intermediary,
In the case of partnership firms, the Circular outlines the following scenarios:
- Transfer of ownership interest in a partnership firm.
Where a SEBI registered entity is registered as a partnership firm with more than 2 (two) partners, then inter-se transfer amongst the partners shall not be considered change in control. Where the partnership firm has only two partners, the same would stand dissolved upon the death of one of the partners.
This exemption is not applicable to the induction of a new partner in the firm, as the same would be considered as a change in control, requiring prior approval of, and fresh registration with, SEBI.
- Transmission of ownership interest in a partnership firm
If the incorporation documents of a partnership firm specify that the legal heir(s) of a deceased partner will assume partnership rights, then in such cases the partnership firm is reconstituted and bequeathing of partnership right to legal heir(s) via transmission shall not be considered as change in control.
Any transfer or transmission also needs to satisfy the “fit and proper person” criteria outlined in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
The Investment Adviser Administration and Supervisory Body (“IAASB”) and Research Analyst Administration and Supervisory Body (“RAASB”) are directed to bring the contents of the Circular to the notice of IAs and RAs respectively, disseminate the contents on their websites and make necessary amendments to the relevant bye-laws, guidelines, standard operating procedures, etc. for the implementation of the Circular.
Analysis
The clarifications provided in the Circular represent a step forward in the direction of streamlining regulatory compliance for IAs, RAs and KRAs. These measures strengthen the goal of protection of investor interest by ensuring transparency in the functioning of the intermediaries.
