The Securities and Exchange Commission of India (SEBI) (SEBI)’s decision to allow merchant bankers, managers and bond trustees to take on unregulated activities without robbing them to separate entities could open the door to regulatory arbitration, disputes, disputes and rough avoidance, experts said.
The SEBI Board of Directors required that it be retired to another entity for such activities at its December meeting. After putting the rules on hold at the board meeting in March, regulators recently reversed it, allowing fee-based, unregulated financial services to be implemented within the same company.
“At the heart of this issue is the fundamental principles of ring fencing regulatory activities from unregulated activities to prevent conflicts of interest, ensure operational integrity and maintain regulatory oversight.”
Regulations
This rollback reduces the burden of compliance, but also runs the risk of muddying the waters of accountability and supervision. “If regulatory and unregulated activities coexist with the same entity, legality can be covered by restriction avoidance or fraudulent business,” said Prachi Shrivastava, founder of Lawfinity Solutions.
For example, underwriting or customer profiling registered NBFC outsourcing loans to unsupervised and unregulated customer profiling to technology affiliates could violate RBI’s digital lending standards.
“If there is an outbreak or regulatory violation, it is difficult to unlock responsibility and responsibility if both regulated and unregulated activities take place under the same roof,” Sahai said.
Pranav Bhaskar, a senior partner at SKV Law Offices, agreed that a dispute could arise if the decisions or advice provided under the Savved Functionality are affected by unregulated or different regulatory activities. “Clients and investors may have higher risk, less transparency and fewer ways of complaint relief if things go wrong with these unregulated activities,” he said.
Reputation risk
Overlap in structure management can cause enforcement issues such as insider access, misuse of client data, and more. It could lead to the possibility of false sales, cooperation, reputational ripple risks and excessive benefits of confidential or nonpublic information obtained through regulated businesses. Legal experts said it could be structured to bypass KYC norms, capital adequacy rules, or fee model restrictions.
“But even if it’s all legally watertight, there’s a big reputation risk signal here. Even within legal limits, if a company is deemed deliberately avoiding regulations through structuring, it’s similar to avoidance,” Srivastava said.
If a client, regulator, or media outlet doesn’t easily understand who is responsible for what, and it indicates opacity. Venture capitalists or institutional investors often view opaque hybrid models as red flags of governance, especially when disclosure is vague or when brand names are shared between weapons.
More clearly
“As with any rights that could be abused, this could also be misused,” said Archana Balasubramanian, partner at Agama Law Associates, adding that for many intermediaries, clarity of implementation is still lacking.
As problems arise, regulators may need to implement stricter definitions or retrospective scrutiny, causing credibility to collapse with similar business models.
Experts suggest that SEBI must follow enforceable guardrails such as enforceable internal separation, regular audits, independent compliance officers, and client disclosure.
Released on June 28, 2025
