IFSCA

Regulatory Framework for Distribution of Capital Market Products & Services

The International Financial Services Centres Authority (IFSCA) Regulations 2021, with the aim to develop and regulate financial products, services and institutions in the international financial centres, has notified regulatory framework for the distribution of capital market products & services under IFSCA^[1] (Capital Market Intermediaries) Regulation 2021. The distributors of capital products & services played a crucial role in the distribution. Further, the IFSCA has enabled the registered distributors to undertake global distribution from IFSC and offer their services to clients in various jurisdictions. To protect the client’s interest, the regulatory framework provides for the various eligibility requirements, code of conduct, other obligations, various permissible activities, responsibilities of service providers IFSC and issuers etc. The present article will cover the regulatory framework in detail.

Applicability and Obligation to Seek Registration

Registration: The entity willing to set up operations in IFSC to act as a registered distributor must register themselves with authority as per Regulation 3 of IFSCA (Capital Market Intermediaries) Regulations 2021. Further, the entity needs to comply with all the conditions mentioned in the regulations, circular and any other guidelines or circular issued by the authority from time to time.

Code of Conduct:  The entity that undertakes the distribution of capital products & services offered by the issuers and service providers but does not set up operations in an IFSC must be required to comply with the below conditions mentioned in the code of conduct.

Other guidelines: The registered distributors shall be further subject to regulations, circulars or guidelines.

Application for Registration 

The entity willing to register itself as the registered distributor shall need to submit an application form with authority in the specified format along with the application fees. The entity desirous of registering itself as the registered distributor is further required to submit the following documents along with the application form:

1. Details of principal officers and the persons authorised to provide distribution services on behalf of the entity.

2. Details pertaining to qualification, work experience and certification of the principal officers and the authorised person.

3. Regulatory business plan and information relating to:

• Types of clients proposed to be catered.
• Types of proposed capital market products & services to be distributed.
• Proposed process for ascertaining the risk profiling and assessing the suitability of the capital market product & services.
• Detailed description in relation to the proposed system and controls to ensure that its business activities comply with applicable laws and regulations.
• A detailed description of the proposed governance and risk management framework.
• Additional declarations:
  • That principal officer and the associated person shall comply with the qualification and certification requirements.
  • That entity will not obtain any amount in the form of remuneration or compensation from the client in relation to capital market products & services.
  • That it complies with the code of conduct.

Simplified Registration Process for Certain entities

The regulatory framework has allowed the following entities to apply for a simplified registration to act as a registered distributor though sending an application, letter of intent, and details of existing license or Registration:

1. Licensed banking authority under Regulation 3 (5) of IFSCA (Banking) Regulations 2020.
2. Registered Finance companies or Finance Units under Regulation 3 (7) of IFSCA (Finance Company) Regulations 2021.
3. Registered broker-dealers, investment bankers and investment advisers under Regulation 10 of the capital markets intermediaries regulations.
4. Registered corporate agent sunder Rgeualtion7 (2) of Insurance Intermediary) Regulations 2021.
5. Any other entity

Establishment in IFSC

The entity willing to register itself as the registered distributor must be present in IFSC through establishing a branch or forming a company or limited liability partnership or body corporate or partnership firm or proprietorship firm or any other form. However, such branch structure is permitted only for such company or LLP (Limited Liability Partnership) or body corporate which is already registered, licensed, regulated or authorised to undertake the distribution activities in foreign or Indian jurisdiction.

Net Worth Requirement for the Entity

The entity seeking Registration as a registered distributor must maintain a net worth of at least USD 50,000 at all times. Further, the regulated distributor must maintain the highest of the applicable minimum net worth requirements if it is registered, licensed, or authorised with authority in multiple categories.

Qualification and Experience Requirements

Appointment of principal officer and its Qualifications: The entity willing to register itself as the registered distributor must have at least one person who will act as a Principal Officer and possess the following qualifications:

1. Professional qualification or postgraduate degree or postgraduate diploma in finance, law, accountancy, business management, commerce, economics, capital market, insurance or actuarial science from a university or institution recognised by central government or state government or recognised foreign university or institution or association or CFA charter from the CFA institute Certification from any organisation or institution or association or registered stock exchange.
2. Experience of 5 years in the securities market or financial products or services as portfolio manager, broker-dealer, investment adviser, research analyst, distributor or fund management.

 Other Persons and their qualifications: Apart from appointing a principal officer, the registered distributor must appoint adequate manpower for its business activities. The employee other than the principal officer shall at least hold a graduation degree from a university or an institution recognised by the central or state government or foreign university. Further, the entities registered, licensed or authorised may identify any of its existing employees for the distribution activities as long as there are no conflicts, no violation of any law and are complying with requirements.

Principal Officer responsible for registered distributor: The principal officer will be held liable for the distribution activities undertaken by the registered distributor and ensure that employees of the registered distributor are aware of the obligations applicable under regulations.

Code of Conduct

The registered distributor must abide by the code of conduct under the regulations and the circular. Further, it can engage or tie up or collaborate or enter into an arrangement with any person for undertaking permissible activities. It can have such arrangements only with those entities that are set up in India or foreign jurisdictions and ensure that:

• It conducts an assessment for every entity it is willing to enter into an arrangement with as n associated distributor to ascertain whether the code of conduct is followed. The registered distributor is further required to maintain records of such assessments.
• It ensures that associated distributors comply with the code of conduct in so far as permissible activities are carious out as per the arrangement.

The registered authority is further required to make any material changes provided to the authority.

Permissible Activities

The registered distributor is allowed to undertake the following activities:

1. Distribution of capital market products & services to any clients in IFSC or Foreign jurisdictions: The capital market products & services offered by any regulated financial entity set up in India, IFSC, and jurisdictions notified through gazette no. 882 (E) dated 28^th November 2019 may be distributed to any client in IFSC or foreign jurisdictions.

2. Distribution of capital market products & services to sophisticated investors in IFSC or foreign jurisdictions: The capital market products & services offered by any issuer or service provider set up in India, IFSC or any foreign jurisdictions may be distributed to sophisticated investors in IFSC or Foreign jurisdictions.

3. Distribution of Capital market products & services to any client in India: The capital market products & services offered by any regulated financial entity set up in IFSC or jurisdiction notified through gazette no. 882 (E) dated 28^th November 2019 or any other jurisdiction specified by the authority may be distributed to any client in India.

4. Distribution of Capital market products & services to sophisticated investors in India: The capital market products & services offered by any issuer or service provider set up in IFSC or any foreign jurisdictions may be distributed to sophisticated investors in India.

5. Any other activities specified by the authority: The registered distributor shall further ensure that the capital market products & services distributed have been authorised, vetted or approved for offering to all types of investors by the relevant regulatory or supervisory authority of such regulated financial entity. Further, it shall also ensure that it complies with all the laws prevalent in the jurisdictions of issuers, clients and service providers.

Obligations/Responsibilities of the Distributors

The obligations or responsibilities of the distributors are as follows:

1. The registered distributor must ensure that there is a clear segregation of its proprietary investments with those carried out as part of its distribution activities.

2. The registered distributor shall not take any asses of the client, including funds & securities, in its custody or exercise any control over the management of the assets.

Exception: The registered distributors may facilitate clients through an omnibus account structure to invest in the jurisdictions if they have a net worth of more than USD 1, 50,000 and are also registered with the IFSC authority. In this case, the registered distributor shall ensure that:

1. The investments met are undertaken under the consent of the clients.
2. There are adequate checks and processes to ensure inter-se separation of clients’ funds and securities.
3. Each client’s contribution to the omnibus structure met a minimum requirement specified by the issuer or the service provider.
4. There is compliance with KYC, Anti-Money Laundering or Combating the financing of terrorism norms.
5. Appropriate arrangements shall be made to ensure that the client’s records are immediately available to the authority whenever required. 

3. The registered distributor is required to disclose the following information to the prospective clients so that the clients can make an informed decision on whether or not they avail of its distribution services:

1. Business activities
2. Disciplinary history
3. Terms & conditions on which it offers distribution services
4. Affiliations with other intermediaries
5. Conflict of interest
6. Any other material information

4. The registered distributor must enter into a written agreement with its clients and issuers or service providers whose capital market products & services it undertakes to distribute. Further, it may enter into an agreement with the associated distributor if the associated distributor has a written agreement with an issuer or a service provider. These agreements will act as a relationship, mutual rights, liabilities, obligations and other material details.

5. The registered distributor further ensures that the sophisticated distributor understands the risk associated with the capital market product & services to be distributed.

6. The registered distributor must assist and arrange necessary documents in relation to the following:

1. KYC
2. AML/CFT
3. Power of Attorney
4. Investor’s Agreements
5. other documents 

 7. The registered distributor must obtain Registration, authorisation or license from the authority for undertaking any activity beyond the scope of this circular.

Distribution through Digital Mode

The registered distributor can enter into an agreement with the issuers, service providers or associated for the sale of capital market products & services through any digital mode. Further, while transacting through digital mode, the registered distributor, issuers and service providers shall ensure that the responsibilities and obligations mentioned above are duly discharged.

Obligations/Responsibilities of Issuers and Service Providers set up in IFSC.

1. The issuer or a regulated financial entity set up in IFSC must ensure the following in case of empanelled distributor:

• The assessment is carried out to ensure that the distributor complies with the code of conduct before such empanelment.
• The empanelled distributor must also comply with the code of conduct on an ongoing basis in so far as the activities are undertaken for the distribution of capital market products & services of that issuer or regulated financial entity concerned.

2. The issuer and the regulated financial entity must ensure that their empanelled distributes comply with regulations and circulars. In case of any non-compliance, the issuer and the regulated financial entity shall report the details of non-compliance to the authority.

3. The regulated financial entities will continue to bear the responsibility of compliance with all the applicable laws with respect to clients solicited by the distributors.

Fees for Registered Distributors

The registered distributors are required to pay the fee to the authority:

1. Application fee: One-time non-refundable fee of USD 750.

2. Registration Fee: One-time non-refundable fee of USD 7,500.

3. Annual Fee: USD 2,000

Conclusion

The entity willing to undertake the activity of distribution of capital market products & services is required as a registered distributor needs to comply with the specified conditions. Further, the distributors may offer their services to sophisticated investors and distribute capital products & services to them; the distribution to other investors will be done with a higher level of due diligence and from a restricted set of products and services. The distributors are permitted to enter into an arrangement with other distributors from India, IFSC & foreign jurisdictions to widen the scope of their operations and, get access to the larger pool of issuers and service providers and cater to a broader clientele.

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