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TMI Blog2025 (3) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... mplaint from one Mr. Mahadeo Sadafule against the Appellant, alleging inter alia that the appellant while providing Investment advisory services had promised an assured 10% returns on the investment, no guidance was provided and huge fee was charged. * SEBI conducted an inspection on July 2 and 3, 2015 to verify compliances under IA Regulations for the period between April 1, 2013 and July 2, 2015. * Subsequently, another inspection was carried out by the SEBI on and September 11-12, 2017 to verify compliances with KYC, Risk profiling, adherence of order dated November, 11 2016 and January 20, 2017. On June 1, 2018, the SEBI shared the inspection report with the appellant and appellant filed his reply on June 19, 2018. * Thereafter, SEBI based on the findings of inspections, issued a common SCN dated September 28, 2021. * In the meanwhile, the appellant filed an application under SEBI (Settlement Proceedings) Regulations, 2018 on November 25, 2021. The same was rejected and the impugned order was passed. 3. We have heard Shri Vedchetan Patil, learned advocate for the appellant and Mr. Pradeep Sancheti, learned Senior Advocate for the respondent. 4. At the outset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay in initiation of proceedings is untenable. 10. With regard to double jeopardy, Mr Sancheti submitted that both proceedings are of different nature. The Ld. WTM exercise power under Section 11 and 11B of the SEBI Act to issue directions, while the order in question was passed by the Ld. AO exercising powers under Section 15-I of the SEBI Act for imposing penalty. 11. With regard to violation of principles of natural justice while rejecting the application for Settlement, he submitted that an appeal against rejection of application for settlement is expressly barred under Section 15JB(4) of the SEBI Act. Hence the said ground is meritless. 12. We have carefully considered the rival submissions made on the aforementioned general grounds. 13. The first objection is delay in commencing the proceedings. It is not in dispute that first inspection was conducted in 2015. Thereafter further complaints were received which led to second inspection in 2017 which revealed new facts. Hence a common SCN (Show Cause Notice) was issued on September 28, 2021. Since all these complaints are with regard to investment advices given by the appellant, we do not find any error in issuing a common s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the subsequent inspection carried out on September 11th and 12th, 2017, appellants were found KYC compliant. The Ld. Advocate also submitted that the AO has drawn the conclusion of violation of Reg. 15(8) only on the basis of appellant's letter dated July 7, 2017, in which it was stated that "KYC forms were not downloaded from KRA earlier. They started doing it only after meeting with SEBI Indore Officer in April 2015". It was submitted that this admission is only with respect to non-downloading of the KYC form and not in with regard to non-compliance of KYC procedure. 17.1.2 In response, Mr. Sancheti admitted that the SEBI circulars no. MIRSD/SE/Cir-21/2011 dated October 5, 2011 and MIRSD/ Cir- 26/ 2011 dated December 23, 2011 were addressed to 'SEBI Registered Intermediaries' and did not specifically cover 'Investment Advisers', as Investment Advisers were not required to be registered with the SEBI. However, in its letter dated May 19, 2014 to the appellant, while granting the certificate, it was clearly stipulated that the appellant was required to comply with the SEBI (KYC Registration Agency) Regulations, 2011 (for short Agency Regulations). Further, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questionnaire of one Mr. Dinesh Choudhary annexed to SCN shows that all the factors of risk profiling are covered therein. With regard to the alleged admission by the appellant vide letter dated July 07, 2015, it was submitted that the Appellant had only accepted the suggestions of the Inspecting Officer that risk profiling and suitability assessment was not carried out as per IA Regulations. 17.2.2 In response, Mr. Sancheti, the Ld. Senior Advocate for the SEBI submitted that a registered intermediary is bound by all applicable IA Regulations. In particular, Regulation 16 requires documentation in respect of an illustrative list of information necessary for providing advisory services. He submitted that the appellant failed to conduct complete risk profiling as some fields were found to be empty and important details such as investment objectives were not even asked for in the questionnaire. 17.2.3 We note that at the time of inspection, the SEBI found the appellant lacking in carrying out complete risk profiling. While some fields were found to be empty in the questionnaire to its clients, important details such as investment objectives were not even captured. The appellant s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to erroneous accuracy rates. It was contended that the formula adopted by the appellant is based on basic mathematical prudence, wherein profitable recommendations are divided by the total recommendations made by the appellant which included even the loss-making recommendations. The Ld. advocate refuting SEBI's contention that the appellant has admitted the allegation vide letter dated July 7, 2015 (Para 9), submitted that the same only mentions that the performance track record was not updated on routine basis. However, the Ld. AO in the impugned order, has modified the term "routine" to "monthly". It was also submitted that the Ld. AO has also failed to take note of the fact that all the relevant information is available on appellant's website 'CapitalVia'. 17.4.2 In response, Mr. Sancheti, the Ld. Senior Advocate for SEBI submitted that the Appellants had not made full disclosure in respect of all material information in documents and advertising materials relating to its investment products, such as the terms and conditions of its advisory services, key high-risk features of its products, performance track record, specific disclaimers and warnings pertaining to its high-risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading recommendations on behalf of its clients. Thus, appellant failed to maintain an arm's length between its investment advisory and execution services activities as required under Regulations 22 of the IA Regulations. 17.5.3 We find that the appellant is not a broker and hence execution activities cannot be carried out by it. The appellant has provided execution services to brokers of some of their clients and it was brokers who used to provide execution services and not the appellant. The appellant's claim that it has not charged any fee for such execution business for client through the brokers, has not been rebutted. Hence, appellant is right in its contention. Accordingly, we hold this point in the negative. 17.6.1 Violation-6: Whether appellant has violated Regulations 15(1) and 15(9) of IA Regulations read with clauses 2 and 4 of Code of conduct? The regulation 15(1) and 15(9) of the IA Regulations require the Investment advisor to act in fiduciary Capacity. It was submitted that the appellant had provided Investment Advice to one Mr. Mahadev Sadafule. However, when he filed a complaint on SCORES portal, the appellant instead of disputing the allegations made, decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, the Ld. Advocate for the appellant submitted that maintaining records of copies of agreements with clients was not mandatory before September 23, 2020. It was only after issuance of the SEBI's circular SEBI/HO/IMD/DF1/CIR/P/2020/182 dated September 23, 2020, that the same was made mandatory from April 1, 2021. According to him, during the inspection period, two circulars dated October 5, 2011 and December 23, 2011 related to KYC were applicable. However, both were applicable to the SEBI registered intermediaries and did not mention their applicability to Investment Advisors. The appellant was under the impression that these circulars were not applicable to Investment Advisors and the non-compliance if any by the appellant, was in good faith. 17.7.2 Refuting appellant's plea, Mr. Sancheti submitted that the appellant had clearly violated the Regulation 19 by not maintaining proper records with respect to KYC, RP and others. In SEBI's letter dated May 19, 2014 to the appellant, it was stipulated that the appellant was required to comply with SEBI (KYYC Registration Agency) Regulations, 2011. Therefore, the plea of ignorance is untenable. 17.7.3 In our view, though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d refund of remaining service fees. We also find that no evidence has been brought on record by the SEBI to corroborate that services were offered without risk profiling. No evidences is placed before us also to demonstrate that assured returns were offered by the appellants and it also not specific case of the complainant. Therefore, we find force in appellant's argument and find no material in support of SEBI's allegation that appellant had failed to act with due skill, care and diligence in the best interest of its clients. Accordingly, we hold this point in the negative. 17.9.1 Violation-9: Whether appellant has charged excess fee in violation of Clause 6 of Code Of Conduct, under Schedule III of IA Regulations, 2013? Learned Advocate for the appellant submitted that the fees charged from 43 clients mentioned at Para 60 of the Impugned order was collected over a period of time and no client has made any complaint regarding exorbitant fee. Further, till April 2021, there was no ceiling on the quantum of fee charged by an Investment Advisor. He further submitted that the Ld. WTM in the order dated January 20, 2017 has found that it is 'not proved' that the appellant has charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant's contention that Mr. Sadafule actually wanted to invest more than Rs. 6-10 lakhs, is not supported by any evidence. Appellant was bound by the Clause 6 of the COC of the IA Regulations to charge fair and reasonable fee from its client. In view of undisputed fact that appellant has charged Rs. 25 Lakhs as fee and seeks to justify without any material that it was for two and half years, we hold this appoint also in the affirmative. 17.10.1 Violation-10: Whether appellant is guilty of soliciting of clients through different websites, in violation of Clause 5 of COC under Schedule III of IA Regulations? With regard to the above allegation, Mr. Mr. Patil submitted that various Websites listed by the appellant were only for lead generation and no actual advisory business was done through them and these were at best landing pages. Clause 5 of Code of Conduct applies to clients only and not to prospective clients. It was further submitted that people who landed on appellant's website through lead generating websites were not even prospective clients, though they may later become prospective clients and contended that the allegation is baseless. 17.10.2 In response, learned sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings were recorded by the SEBI with regard to dates of joining of individual employees, in order to prove the charge. Further, appellant's submission that the notification dated June 19, 2013 and January 27, 2014 have to be read with Regulation 3(1) and 3(2) of the SEBI (Certification of Associated Persons in the Securities Market) Regulations, 2007 is not refuted. Therefore, in our view, this allegation is not substantiated. Accordingly, we hold this point in the negative. 17.12.1 Violation-12: Whether appellant has violated Regulation 13(c)? Learned Advocate for the appellant submitted that the words 'investment adviser' with the name of appellant were added immediately after inspection by the SEBI. He contended that absence of those words did not have any impact on the market at large. 17.12.2 Refuting appellant's arguments, Mr. Sancheti, -submitted that the Appellant cannot choose to follow a provision of law on the basis of his assessment as to whether it would impact the market or not. It was submitted that the compliance of the regulation post- inspection will not absolve the appellants for the violation committed during the inspection period. Our attention was drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and not the provisions as existed on the date of passing the impugned order. However, the AO has incorrectly relied on the SEBI (Investment Advisors) (Amendment) Regulations, 2020 which became effective on September 30, 2020. 18.2 In response, the Mr. Sancheti, the Ld. senior Advocate for SEBI submitted that penalty of Rs. 1 Crore imposed upon the Appellant under section 15HB is not harsh or unjust and has been rightly imposed on the Appellants considering the gravity of the violations committed and the likely adverse impact on the integrity of the market. It was submitted that even on subsequent inspections carried out for the period from April 1, 2016 to September 11, 2017 and April 1, 2020 to March 31, 2021, Appellant was found violating the provisions. In view repeated nature of violations, the quantum of the penalty is justified in terms of section 15-J. He submitted that the AO has examined the violations in the light of the applicable regulations as on the date violation actual violation. Reproduction of erstwhile regulations could be at best an inadvertent typographical error. 18.3 It is relevant to note that the IA Regulations were prescribed in 2014. By then, appella ..... X X X X Extracts X X X X X X X X Extracts X X X X
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