SEBI Working Group Evaluates Dual Licensing for Individual Mutual Fund Distributors

The structural wall separating product distribution from fee-based investment advice in India may be heading toward a historic recalibration. A dedicated regulatory working group constituted by the Securities and Exchange Board of India is actively deliberating whether individual mutual fund distributors should be permitted to register as investment advisers without surrendering their distribution operations.

The proposal, under active review inside the regulator's policy channels, seeks to extend to solo professionals the dual-licensing framework currently reserved exclusively for institutional entities and corporate firms. If accepted and notified, this reform would represent the most significant restructuring of intermediary business models since the comprehensive overhaul of investment adviser regulations in 2020. It tackles an intractable problem in Indian retail finance: an expanding capital market powered by hundreds of thousands of distributors on one side, and a stagnating, depleted registry of barely one thousand fee-only advisers on the other.

The Origins of the Great Divide

To understand why dual licensing for individuals is being reconsidered, one must revisit the regulatory architecture established under the SEBI (Investment Advisers) Regulations, 2013, and subsequent amendments notified in 2020.

Under the 2020 regulatory revisions, SEBI introduced an uncompromising separation of execution and advice. The regulator determined that an intermediary could not simultaneously act as a fiduciary delivering impartial financial planning and as an agent earning product commissions from asset management companies. For corporate entities, including banks, national brokerages, and private limited wealth management firms, SEBI permitted the simultaneous operation of advisory and distribution businesses under strict conditions. These firms were required to maintain arm's-length distance between departments and enforce client-level segregation at the group level. Under Regulation 22, an institutional client could be onboarded either for fee-based advisory services or for commission-bearing distribution services, but never both within the same corporate group.

For individual professionals, however, SEBI imposed an absolute choice. An individual could register as a Registered Investment Adviser (RIA) or hold an AMFI Registration Number (ARN) as a Mutual Fund Distributor (MFD), but could not hold both credentials concurrently. An individual distributor seeking to transition into a registered adviser was required to surrender their ARN completely. Furthermore, family members of an individual RIA—defined broadly to include spouse, parents, children, and siblings—were barred from conducting distribution activities.

The commercial consequence of this binary mandate was immediate. Transitioning to an individual RIA required abandoning years of accumulated trail revenue on existing assets under management. Because trail commissions represent the recurring economic lifeblood of a distribution practice, very few established distributors could afford the financial shock of surrendering their ARN to start an unproven fee-charging model from scratch.

The Advisory Deficit and the Finfluencer Vacuum

While the regulatory intention was to eliminate conflicts of interest, the operational reality diverged sharply from expectations. Over the subsequent six years, the Indian investing landscape experienced unprecedented growth, with demat accounts surging past 20 crore and mutual fund folios expanding across Tier-2 and Tier-3 geographies. Yet the regulated advisory ecosystem contracted.

Data maintained by SEBI and the Association of Registered Investment Advisors shows that the total number of registered investment advisers in India hovers around 1,000, comprising approximately 470 individuals and 530 corporate entities. In 2020, that figure stood above 1,500. While the domestic investor base quadrupled, the number of licensed advisers shrank by roughly one-third. In contrast, AMFI registers over 1.5 lakh active mutual fund distributors who manage retail outreach across thousands of pin codes.

The scarcity of regulated advisers created an acute advisory vacuum. Earlier this year at the ARIA Aspire conference, SEBI Chairman Tuhin Kanta Pandey flagged the decline in registered advisers since 2021 as a matter of serious regulatory concern. The SEBI Chairman noted that when regulated fiduciary advisory capacity fails to keep pace with retail market expansion, the resulting void is inevitably occupied by unregistered social media personalities and unregulated financial influencers who package speculative market bets and product promotions as strategic advice. A SEBI investor survey revealed that approximately 62% of prospective retail participants are swayed by unregulated digital commentators.

Recognising that the fee-only RIA model had failed to scale down to middle-class households outside metropolitan centres, SEBI constituted the current working group to review the distributor regulatory framework, eliminate friction points, and explore harmonisation between the two intermediary categories.

What Dual Licensing for Individuals Would Entail

The model now being evaluated by the SEBI working group does not propose merging advisory and distribution into an unmonitored hybrid, but rather introducing parity between individual professionals and corporate entities.

Under the framework under discussion, an individual professional would be permitted to maintain both an ARN registration with AMFI and an RIA registration with SEBI. The primary mechanism governing the practice would be strict, verifiable client-level segregation.

In practice, this means an individual practitioner could maintain two distinct books of business:

1. Advisory Relationships: For clients engaged under the RIA registration, the practitioner would act as a fiduciary, charge an agreed advisory fee directly to the client, and recommend solely direct plans of mutual fund schemes or unbundled securities. No commission, brokerage, or trail consideration could be accepted by the practitioner on these accounts.
2. Distribution Relationships: For clients engaged under the ARN registration, the practitioner would act as a distributor, facilitating transactions in regular plans and receiving trail commissions directly from asset management companies, while providing incidental information without levying advisory fees.

Critically, a single investor could not be serviced under both modes simultaneously. An onboarding client would make an informed election at the inception of the relationship, documented through standardized client engagement agreements and compliance logs.

The Economics of Practice Management

For independent financial professionals running advisory and distribution practices, the potential introduction of individual dual licensing changes the long-term viability of their business.

Under the current rules, a distributor wishing to provide comprehensive financial planning has only two realistic pathways: either incorporate a private limited company, satisfy higher capital thresholds, hire separate personnel, and maintain separate corporate infrastructure, or remain an individual MFD and restrict client conversations to factual scheme details to avoid violating advisory regulations. The corporate route carries significant annual audit, legal, and operational overhead that cannot be justified by solo practitioners serving smaller client books.

Dual licensing for individuals would remove the incorporation barrier. It allows an established distributor to preserve existing trail income from legacy distribution assets while gradually developing a fee-based advisory practice for clients seeking unbiased, multi-asset financial planning.

Moreover, this shift directly addresses the compliance ambiguity that has shadowed the distributor community for years. In day-to-day operations, the boundary between recommending an asset allocation strategy and executing a fund purchase is exceptionally thin. Distributors are routinely asked by retail investors to assess retirement readiness, evaluate tax efficiency, and design multi-year asset allocations—tasks that stray into the legal definition of investment advice. Providing a legitimate, dual-licensed channel enables qualified distributors to offer formal planning legally, charge for their intellectual labor, and maintain separate books without fear of regulatory enforcement actions against their primary distribution business.

Structural Challenges and Industry Debates

While the distributor fraternity has long advocated for dual licensing, the proposal faces scrutiny from existing fee-only advisers and governance experts regarding conflicts of interest.

The core regulatory debate centres on whether an individual human being can realistically maintain Chinese walls within a single practice. In an institutional setup, separate compliance officers, separate technology portals, and distinct reporting hierarchies manage the boundary between the wealth advisory desk and the third-party product distribution desk. For a solo practitioner operating from a single office, the temptation to steer an advisory client toward high-commission distribution products, or to cross-subsidize advisory fees with distribution earnings, remains a structural hazard.

Industry bodies representing registered advisers have consistently argued that fee-only fiduciaries must remain untethered from product manufacturers. Allowing distributors to wear both hats could blur consumer perception, making it difficult for an ordinary saver to discern whether their planner is speaking as an independent fiduciary or as a commissioned sales agent on any given day.

To counter these concerns, the working group is examining stringent compliance checks. These include mandatory periodic audits by independent chartered accountants to verify client-level segregation, standardized digital engagement records, integrated disclosures on all client communication portals, and clear regulatory classifications within SEBI's upcoming digital platform, SEBI SETU.

What This Means for Retail Investors

For everyday mutual fund investors, a transition toward dual licensing would bring much-needed clarity and broadened access.

First, it would expand the geographic reach of professional financial planning. Because fee-only RIAs are predominantly concentrated in major metropolitan cities and typically require minimum portfolio sizes to cover their operational costs, households in semi-urban India have had virtually no access to regulated, fee-based financial planners. Empowering qualified local distributors with advisory capabilities allows regional investors to access professional financial planning from practitioners they already trust.

Second, it establishes formal accountability. Today, many investors receive informal advice from distributors under the impression that it represents comprehensive planning, without realising that the distributor is compensated entirely by product manufacturers. A formal dual-licensing structure forces explicit disclosure: the investor signs an agreement confirming whether they are paying for independent advice or receiving execution services through regular plans.

The working group's deliberations represent an acknowledgment by the capital markets regulator that rigid structural barriers have constrained the growth of professional advice in India. While formal consultation papers and board approvals remain necessary before any regulatory text is amended, the active reconsideration of dual licensing signals a pragmatic shift toward building a deeper, more sustainable ecosystem for investors and financial professionals alike.