In a landmark move aimed at reducing operational hurdles and enhancing regulatory flexibility, the Securities and Exchange Board of India (SEBI) has approved the use of liquid and overnight mutual funds as acceptable instruments for compliance with deposit requirements by Investment Advisers (IAs) and Research Analysts (RAs). This is a shift from the earlier mandate of maintaining fixed deposits alone. The regulator also introduced a one-time settlement scheme for Venture Capital Funds (VCFs) that failed to wind up within prescribed timelines, providing a practical path forward for such funds post-migration to the Alternative Investment Funds (AIF) regime.
SEBI Broadens Deposit Options for IAs and RAs
Until now, Investment Advisers and Research Analysts were required to maintain a lien-marked fixed deposit (FD) with a scheduled commercial bank to satisfy regulatory requirements. However, various stakeholders raised concerns over inconsistent banking practices, particularly regarding third-party FDs and the lien marking process. In response, SEBI has authorized the use of liquid mutual fund and overnight fund units—also lien-marked in favor of the relevant regulatory authority—as alternative deposit instruments.
Liquid mutual funds, characterized by low risk and high liquidity, are considered suitable for this purpose, especially given their compatibility with digital infrastructure and dematerialized (demat) operations. Overnight funds, which invest in instruments with one-day maturity, also offer similar low-risk profiles and operational flexibility. This regulatory change aligns with SEBI’s broader goal of promoting ease of doing business in the financial advisory and research space.
Enhancing Regulatory Ecosystem Through Digitization and Risk Reduction
SEBI underscored the technological and ecosystem benefits of allowing mutual fund units to serve as compliant deposits. Since mutual fund folios can be accessed via mobile apps or websites, they offer a seamless and secure method for fulfilling compliance obligations. Additionally, the operation and invocation of lien on such instruments remain within the securities market ecosystem, which boosts transparency and efficiency.
This flexibility is also expected to reduce the administrative burden on professionals and promote broader participation in the advisory and research domains—two crucial pillars in India's growing retail investor base.
Evolution of Regulatory Norms for IAs and RAs
This latest move is part of a broader suite of reforms rolled out over the past year. In December 2024, SEBI revised multiple norms for IAs and RAs, including:
- Lowering the qualification requirement from post-graduate to graduate levels.
- Replacing mandatory industry experience with a continuing professional education model.
- Eliminating net-worth requirements in favor of a deposit-based compliance framework.
Additionally, in March 2025, SEBI allowed advisers and analysts to collect fees in advance for up to one year—an easing of earlier fee collection restrictions. Collectively, these reforms reflect SEBI’s commitment to nurturing a professional and compliant advisory ecosystem without stifling operational agility.
One-Time Settlement Scheme for Venture Capital Funds
In another significant decision, SEBI has introduced a one-time settlement scheme for Venture Capital Funds that failed to wind up their schemes within prescribed timelines under earlier regulations. This initiative is aimed at VCFs that have now transitioned to the AIF (Alternative Investment Fund) regime but continue to carry legacy compliance burdens.
Under this scheme, VCFs will be required to pay a structured settlement fee comprising:
- Rs. 1 lakh for delay up to one year.
- Rs. 50,000 for every additional year (or part thereof).
- A slab-based amount between Rs. 1 lakh and Rs. 6 lakh depending on the cost of unliquidated investments.
The deadline to apply under this scheme is January 19, 2025, and SEBI clarified that all settlement-related costs must be borne by the Investment Manager or Sponsor. While the migration provides these funds with extended timeframes for asset liquidation, it does not absolve them of past non-compliance. The scheme is designed purely to address delays in scheme closure, without passing on any financial burden to investors.
Conclusion
By expanding the deposit compliance instruments for IAs and RAs and introducing a pragmatic settlement window for legacy VCFs, SEBI has demonstrated a regulatory approach grounded in flexibility, responsiveness, and investor protection. These policy shifts are likely to further professionalize India’s financial advisory sector and encourage responsible transitions within the alternative investment space.
This dual-pronged regulatory update not only enhances ease of doing business but also reinforces SEBI’s vision of a more agile, inclusive, and tech-integrated capital market ecosystem.
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