The Securities and Exchange Board of India (SEBI) has proposed a major shift in compliance mechanisms for investment advisers (IAs) and research analysts (RAs). In a consultation paper released on Friday, SEBI suggested allowing these market intermediaries to use lien-marked liquid mutual fund units as an alternative to bank fixed deposits for fulfilling their mandatory deposit requirements.
This proposal addresses long-standing grievances from professionals in the advisory and research space, who have faced several operational bottlenecks in complying with the current deposit norms.
Understanding the Existing Framework
Under SEBI’s current regulations, registered investment advisers and research analysts must maintain a security deposit with a scheduled commercial bank. The deposit must be marked with a lien in favor of the relevant supervisory body. SEBI mandates this requirement as part of the registration process and insists on its continued fulfillment throughout the validity of the registration.
The deposit acts as a safeguard, ensuring accountability and financial stability among IAs and RAs. The rules require all registered professionals to comply with this deposit condition by June 30, 2025.
However, numerous challenges have hindered smooth compliance. SEBI acknowledged receiving multiple representations from industry participants. These representations described the difficulties in opening fixed deposit accounts and in processing lien marking at the bank level.
The Challenges Faced by Market Intermediaries
Investment advisers and research analysts reported several practical roadblocks. First, they highlighted inconsistent procedures across bank branches. Some branches refused to process lien marking, while others lacked clarity on SEBI’s specific requirements.
Second, professionals faced delays in receiving acknowledgment documents, which they needed to submit to SEBI or the Administration and Supervisory Body (ASB). Even minor procedural gaps often led to non-compliance issues, threatening the validity of their registration.
Third, confusion around SEBI’s lien rules led to erroneous documentation, requiring back-and-forth correspondence between professionals, banks, and supervisory bodies. Moreover, limited awareness among bank employees compounded the situation. Staff often lacked training on regulatory lien documentation or SEBI’s unique formats.
These challenges made compliance unnecessarily cumbersome and time-consuming, especially for smaller firms and individual advisers.
SEBI’s Proposed Alternative: Liquid Mutual Fund Units
To mitigate these difficulties, SEBI has proposed accepting lien-marked units of liquid mutual funds as an alternative deposit mechanism. Investment advisers and research analysts can now hold these mutual fund units either in a demat account or in Statement of Account (SOA) format. The units must carry a lien marked in favor of SEBI or the concerned supervisory body for at least one year.
This move introduces much-needed flexibility while retaining the regulatory safeguard objective.
Liquid mutual funds invest primarily in short-term debt instruments such as treasury bills, commercial paper, and certificates of deposit. These instruments provide relatively low risk and high liquidity. Because of their inherent stability, SEBI considers liquid mutual fund units a suitable alternative to fixed deposits.
Valuation and Monitoring Mechanism
SEBI has laid down a clear valuation mechanism to govern this arrangement. The value of lien-marked liquid mutual fund units will be calculated after deducting applicable exit loads and applying a specified haircut. This net value will count towards fulfilling the deposit requirement.
To ensure that the security remains adequate, SEBI mandates annual reviews of the value of such mutual fund holdings. If the value of the units falls below the prescribed threshold or if the adviser or analyst expands their client base—thus requiring a higher deposit—then the professional must add more units to maintain compliance.
This framework keeps the risk profile of the deposit instrument in check while allowing advisers and analysts more autonomy in choosing their compliance path.
Implications for the Investment Advisory Ecosystem
The proposed move could have far-reaching benefits for investment advisers and research analysts, especially independent professionals and boutique firms. They can now avoid the cumbersome paperwork and variable processes associated with bank lien documentation. By using their existing mutual fund holdings, they can meet regulatory obligations more efficiently.
Moreover, the use of mutual fund units aligns better with the nature of the advisory profession, which already revolves around mutual fund knowledge and portfolio allocation. It also reduces the dependency on banking infrastructure, streamlining the compliance process.
SEBI’s initiative also marks a broader shift towards recognizing technology-driven and investment-linked solutions in regulatory compliance. As more market participants operate digitally and use online platforms for transactions, incorporating mutual fund units into the deposit framework provides a more modern and adaptable solution.
Regulatory Safeguards and Oversight
Despite the operational relief, SEBI has ensured that regulatory safeguards remain intact. The mandatory lien period of at least one year prevents misuse of the liquidity benefit associated with mutual fund units. Moreover, the haircut application and exit load deduction reduce valuation risk, providing an appropriate cushion against market fluctuations.
By retaining the requirement for annual valuation reviews and top-ups in case of deficiency, SEBI ensures that the deposit continues to act as an effective compliance buffer. These safeguards uphold the integrity of the advisory ecosystem while accommodating practical difficulties faced by market intermediaries.
Dual Option for Greater Flexibility
SEBI has also retained the bank fixed deposit option, giving professionals the freedom to choose the mode that best suits their operational convenience. This dual option enhances inclusivity and allows for customized compliance based on the size and nature of the advisory or research entity.
Some advisers may prefer the familiarity and certainty of a traditional fixed deposit. Others, particularly those well-versed in mutual fund operations, may opt for lien-marked liquid fund units.
By offering both options, SEBI ensures that no market participant is disadvantaged due to infrastructural constraints or procedural bottlenecks.
Public Consultation Open Till May 29
SEBI has invited public comments on this proposal until May 29, 2025. This period gives industry participants, legal experts, and investors the opportunity to analyze the proposed changes and suggest improvements, if any.
Through this consultative approach, SEBI reinforces its commitment to transparency and inclusivity in policymaking.
Conclusion
SEBI’s proposal to allow investment advisers and research analysts to use lien-marked liquid mutual fund units as a compliant deposit marks a significant step forward. It addresses key operational difficulties, modernizes the compliance process, and introduces flexibility without compromising regulatory objectives.
The move not only enhances ease of doing business for smaller advisory firms but also aligns regulatory practices with the evolving structure of India’s financial markets. As the mutual fund ecosystem matures and retail participation increases, such steps reflect SEBI’s forward-looking approach in crafting balanced, responsive, and investor-friendly regulations.
