SEBI Investment Advisers Second Amendment Regulations 2025: Deposit System, Fee Caps, and AI Disclosure

The Securities and Exchange Board of India notified the SEBI (Investment Advisers) (Second Amendment) Regulations, 2025 on 16 December 2024, with supporting guidelines issued by circular in January 2025. These amendments overhaul the compliance framework for registered Investment Advisers (IAs) in India, replacing the previous net worth requirement with a deposit-based system, recalibrating fee structures, introducing a mandatory AI usage disclosure obligation, and requiring IAs to provide clients with a standardised Most Important Terms and Conditions document. The changes come against the backdrop of a sharp increase in registered IAs since SEBI's 2020 regulations, and a rising volume of consumer complaints about mis-selling and undisclosed conflicts of interest.

From Net Worth to Deposits: The New Entry Barrier

The previous regime required IAs to maintain a minimum net worth as a financial prerequisite for registration. The amended regulations replace this with a deposit requirement. Registered IAs must maintain a deposit marked under lien in favour of the Investment Adviser Administration and Supervisory Body (IAASB), which is housed within BSE Limited. The deposit serves as a deterrent against fly-by-night advisory operations and provides a fund against which client claims can be enforced if the IA defaults. The quantum of the deposit is calibrated to the IA's client base and assets under advice, so larger advisory practices face proportionately higher deposit requirements. Individual and non-individual IAs are subject to different deposit scales, with non-individual entities required to maintain larger deposits than sole practitioners.

Revised Fee Structures Under the AUA and Fixed Fee Modes

The 2025 amendments preserve the two fee modes that SEBI introduced in earlier regulations: the Assets Under Advice (AUA) mode and the Fixed Fee mode. Under the AUA mode, IAs may charge up to 2.5 percent of assets under advice per annum per client family. Under the Fixed Fee mode, the maximum chargeable fee has been raised to Rs 1,51,000 per annum per family of clients, an increase from the previous ceiling. This upward revision in the fixed fee ceiling reflects the growth in inflation and the increasing complexity of advisory services since the earlier fee caps were set. The regulations continue to prohibit IAs from receiving commissions, distribution fees, or any third-party remuneration from product manufacturers, reinforcing the fee-only advisory model that SEBI has been promoting since 2013 to remove conflicts of interest.

Mandatory AI Disclosure: A First for Indian Securities Regulation

One of the most forward-looking provisions in the 2025 amendments is the mandatory AI usage disclosure. An IA that uses artificial intelligence tools in providing investment advice to clients must disclose the extent of such use at the time of entering into the advisory agreement. IAs with existing clients were required to provide this disclosure by 30 April 2025. The disclosure must cover what AI tools are used, in what stages of the advisory process they are applied, and what limitations the IA acknowledges in relying on AI-generated output. This provision reflects SEBI's concern that retail investors may not understand that the advice they receive has been generated or influenced by algorithms or large language models, and therefore cannot adequately assess the source, consistency, and limitations of the advice. The obligation also ensures that if AI-generated advice proves incorrect or harmful, the record of disclosure provides a factual baseline for assessing whether the IA discharged its duty of care.

Most Important Terms and Conditions (MITC)

With effect from 17 February 2025, IAs are required to provide every client with a Most Important Terms and Conditions document before or at the time of onboarding. The MITC is a standardised summary that distils key contractual obligations, fee structures, the IA's conflict of interest disclosure, the client's right to terminate the engagement, and the grievance redress mechanism under the SEBI SCORES platform. The purpose is to ensure that clients, particularly retail investors who may not read lengthy engagement letters, receive the essential information about their rights and obligations in a clear, accessible format. SEBI has prescribed the content that the MITC must contain, giving IAs limited discretion on its structure.

Practical Takeaways

Registered IAs should confirm that the deposit has been placed with the IAASB in the correct quantum and that it is marked under lien as required. IAs that have not yet issued the AI disclosure to existing clients are in breach of the April 2025 deadline and should regularise compliance without delay. All new client onboarding must include the MITC, and IAs should retain signed acknowledgment copies as evidence of delivery. IAs operating under the AUA mode who have been charging fees in excess of 2.5 percent, and those under the Fixed Fee mode who have been charging more than the prior ceiling, should review their fee agreements in light of the revised limits. The IAASB provides the supervisory and complaints handling function, so IAs should also update their compliance officers and client communication templates to reflect the IAASB's role as the relevant authority for escalated complaints under these regulations.