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Capital Market and Securities Laws · Securities Market Intermediaries

Other Intermediaries and SEBI Oversight: FPIs, AIFs, Custodians

Updated 11 October 2026 · Fact-checked

Other intermediaries include foreign portfolio investors, venture capital funds, alternative investment funds and custodians. Under Section 12 of the SEBI Act, 1992 none may deal without a SEBI registration certificate. SEBI can suspend or cancel it by order, but only after giving a reasonable opportunity of being heard.

Understand Other Intermediaries and SEBI Oversight

The securities market has many players beyond brokers and merchant bankers. Foreign portfolio investors bring foreign money into Indian securities. Venture capital funds and alternative investment funds pool money from investors and put it into unlisted or high-risk businesses. Custodians hold securities safely for clients such as FPIs and mutual funds.

The SEBI Act, 1992 controls all of them through one idea: registration. Section 12(1) covers intermediaries such as stock-brokers, sub-brokers, registrars, merchant bankers, underwriters, portfolio managers and investment advisers. Section 12(1A) covers depositories, participants, custodians, foreign institutional investors, credit rating agencies and any other intermediary SEBI specifies by notification. None of them may buy, sell or deal in securities except under, and in accordance with the conditions of, a certificate of registration from SEBI.

Funds have their own sub-sections. Section 12(1B) bars anyone from sponsoring or carrying on a venture capital fund or collective investment scheme, including a mutual fund, without a certificate. Section 12(1C), inserted in 2021, does the same for an alternative investment fund or a business trust. An Explanation to Section 12 says a collective investment scheme or mutual fund does not include a unit linked insurance policy, or any instrument with an investment component alongside insurance issued by an insurer.

The detailed rules sit in regulations, not in the Act. Section 30(2)(d) lets SEBI make regulations on the conditions for issuing a certificate, the fee, and the manner of suspension or cancellation. Section 12(2) says every application must be made in the manner and with the fees set by regulations.

Oversight ends in enforcement. Under Section 12(3), SEBI may by order suspend or cancel a certificate in the manner set by regulations. The proviso protects the intermediary: no such order can be made unless the person has had a reasonable opportunity of being heard. This is natural justice written into the Act. For categories of AIFs, the FPI categories and the inspection procedure, rely on the SEBI regulations in your study material, as those details are not in the Act text.

Key rules to remember

Registration rule for intermediaries (Section 12(1))
Stock-broker, sub-broker, registrar, merchant banker, underwriter, portfolio manager, investment adviser etc. → no dealing without SEBI certificate
Dealing must be under and in accordance with the conditions of the certificate.
Registration rule for custodians, FIIs and others (Section 12(1A))
Depository, participant, custodian, foreign institutional investor, credit rating agency, other notified intermediary → certificate required
The last category applies only to intermediaries SEBI specifies by notification.
Funds (Sections 12(1B) and 12(1C))
Venture capital fund / collective investment scheme / mutual fund → certificate; AIF / business trust → certificate
Applies to anyone who sponsors or carries on the activity.
Suspension or cancellation (Section 12(3))
SEBI order + manner as per regulations + reasonable opportunity of being heard
An order without a hearing is not valid under the proviso.
Regulation-making power (Section 30(2)(d))
Conditions of registration + fee + manner of suspension or cancellation → by regulations
Shows that the Act sets the principle and the regulations set the detail.

How to solve Other Intermediaries and SEBI Oversight questions

Use this method for any question on registration, funds or SEBI action against intermediaries.

  1. 1Identify the entity: ordinary intermediary, custodian or FPI, venture capital or AIF, or a collective scheme.
  2. 2Name the provision: Section 12(1), 12(1A), 12(1B) or 12(1C), whichever fits.
  3. 3State the core rule: no dealing or sponsoring without a SEBI certificate, and only within its conditions.
  4. 4Apply the facts: check whether the person was registered and whether the conditions were followed.
  5. 5If action is involved, cite Section 12(3): SEBI may suspend or cancel by order.
  6. 6Check the safeguard: was a reasonable opportunity of being heard given? Mention Section 30(2)(d) for the regulation-making power.
  7. 7Conclude clearly: the activity is allowed or barred, or the order is valid or open to challenge.

Quickest way: Entity, section, hearing

When to use it: Use for short-answer or case-based questions when time is tight.

  1. Write the entity and its section in one line.
  2. Add one line: certificate from SEBI is mandatory.
  3. If SEBI acts, add: order under Section 12(3) after a reasonable opportunity of being heard.
  4. Close with a one-line conclusion.

Common mistakes in Other Intermediaries and SEBI Oversight

  • Placing custodians or FIIs under Section 12(1) only.

    Students remember one registration section for all intermediaries.

    Fix: Custodians, depositories, participants, FIIs and credit rating agencies are in Section 12(1A). Venture capital funds and collective investment schemes are in 12(1B), and AIFs and business trusts in 12(1C).

  • Saying SEBI can cancel registration without a hearing.

    Students focus on SEBI's power and forget the proviso.

    Fix: Always write that a reasonable opportunity of being heard must be given before a suspension or cancellation order.

  • Quoting AIF categories or inspection procedure as if they were in the SEBI Act.

    Act and regulations get mixed up.

    Fix: Say that the Act requires registration and the details are in regulations made under Section 30.

  • Treating unit linked insurance policies as mutual funds or collective investment schemes.

    Both pool money and invest it.

    Fix: Recall the Explanation to Section 12: such policies, with an investment component besides insurance issued by an insurer, are not included.

  • Thinking the registration rule applies only to those who deal in securities directly.

    The wording 'buy, sell or deal' seems narrow.

    Fix: For funds, the rule also covers those who sponsor or cause to be sponsored, or carry on or cause to be carried on, the activity.

Worked examples

Example 1

Aarav Capital Advisers, a portfolio manager, continues to manage client portfolios after SEBI suspends its certificate of registration by an order passed without notice. Examine the validity of the order.

Show the solution
  1. Provision: Section 12(1) requires portfolio managers to hold a SEBI certificate and deal only under its conditions.
  2. Power: Section 12(3) lets SEBI suspend or cancel a certificate by order, in the manner set by regulations.
  3. Safeguard: the proviso says no such order shall be made unless the person concerned has been given a reasonable opportunity of being heard.
  4. Application: the order was passed without notice, so no opportunity of being heard was given.
  5. Consequence: the order does not meet the proviso and is open to challenge. Separately, while any valid suspension is in force, the firm cannot deal in securities as a portfolio manager.

Answer: The order is not valid because SEBI did not give Aarav Capital Advisers a reasonable opportunity of being heard, as the proviso to Section 12(3) requires.

Example 2

Meera Ventures wants to launch an alternative investment fund and a venture capital fund in India. Can it start without SEBI's approval? Explain the provisions.

Show the solution
  1. Section 12(1C): no person shall sponsor or carry on the activity of an alternative investment fund or a business trust unless SEBI grants a certificate of registration under the regulations.
  2. Section 12(1B): no person shall sponsor or carry on a venture capital fund or collective investment scheme, including a mutual fund, unless a certificate is obtained from SEBI.
  3. Application: Meera Ventures plans both activities, so it needs registration for each.
  4. Procedure: under Section 12(2), the application must be made in the manner and with the fees set by regulations.
  5. Consequence: it must follow the conditions of the certificate, and SEBI may suspend or cancel it under Section 12(3) after a hearing.

Answer: No. Meera Ventures must first obtain SEBI certificates of registration under Sections 12(1C) and 12(1B), applying as required by regulations.

Exam tips

  • Write the sub-section number with the Section 12 rule. Examiners reward precision.
  • In any suspension or cancellation answer, mention the reasonable opportunity of being heard. It is the usual scoring point.
  • Use the structure the exam expects: provision, facts, conclusion.
  • For AIF categories, FPI categories and inspection procedure, learn the SEBI regulations from your study material and keep them separate from the Act.
  • Link Section 30(2)(d) to show you know that regulations carry the detail.

Practice questions from Securities Market Intermediaries

Other Intermediaries and SEBI Oversight: frequently asked questions

Which section requires FPIs and custodians to be registered?

Section 12(1A) of the SEBI Act covers custodians, depositories, participants, foreign institutional investors and credit rating agencies. They need a certificate from SEBI before they buy, sell or deal in securities. Foreign portfolio investor rules are in SEBI regulations.

Can SEBI cancel an intermediary's registration?

Yes. Section 12(3) allows SEBI to suspend or cancel a certificate by order, in the manner set by regulations. It must first give the person a reasonable opportunity of being heard.

Does the SEBI Act list the categories of AIFs?

No. Section 12(1C) only requires registration for AIFs and business trusts. The categories and their conditions come from SEBI's regulations, so study them from your material.

Are unit linked insurance policies mutual funds?

No. The Explanation to Section 12 says a mutual fund or collective investment scheme does not include a unit linked insurance policy or similar instrument that combines investment with insurance issued by an insurer.