Investment Research Advisor vs Sebi

Two appeals have been filed by the appellants against two

orders. By the first order dated April 26, 2023 the Chief

General Manager ("CGM" for convenience) of the Securities

and Exchange Board of India ("SEBI" for convenience) has

restrained the appellant and another noticee from accessing the

securities market for a period of three years and further

restrained from undertaking either directly or indirectly

investment advisory services or any activity in the securities

market for a period of three years. The CGM further directed

the appellant to resolve all complaints pending on the SCORES

platform and further refund a sum of Rs. 1,53,75,252/- along

with noticee no. 2 received as consideration from investors/

client in respect of the unauthorized investment advisory

activities against this order Appeal No. 626 of 2023 has been

filed.

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2. The appellant has also filed Appeal No. 627 of 2023

against the order dated May 19, 2023 passed by the CGM

cancelling the certificate of registration under the SEBI

(Intermediaries) Regulations, 2008 ("Intermediaries

Regulations" for convenience) and under the SEBI (Investment

Advisers) Regulations, 2013 ("IA Regulations, 2013" for

convenience). Both the orders are against the same violation

and, therefore, both the appeals are being taken up together.

3. The appellant Investment Research Advisor is registered

under the IA Regulations, 2023. Certain complaints were

received by SEBI based on which SEBI carried an investigation

into the affairs of noticee no. 1 and, upon examination, a show

cause notice dated October 13, 2022 was issued. The charges

against the appellants was; (i) violating Regulation 16(a),(b)

and Regulation 17(a) of IA Regulations for not doing risk

profiling and suitability analysis of the client; (ii) failure to

display status of complaints on website and not providing

adequate information to the clients to take informed decisions

thereby violating SEBI Circular dated December 27, 2019; (iii)

running investment advisory activity without having

National Institute of Securities Market ("NISM") certification

thereby violating Regulation 6(b) and Regulation 7(2) read 4

with Regulation 13(a) of IA Regulations; (iv) promising

assured / guaranteed returns to the clients, charging

unreasonable fees in collusion with another unregistered

connected entity noticee no. 2 thereby violating Regulation 3

and 4 of the SEBI (Prohibition of Fraudulent and Unfair

Trade Practices relating to Securities Market) Regulations,

2003 ("PFUTP Regulations" for convenience) read with

Regulation 15(1) of the IA Regulations.

4. Noticee no. 2 was charged of devising a scheme with

noticee no. 1 to defraud the investors by providing its

investment advice on products relating to securities market

without having a registration under the IA Regulations. On the

same facts the designated authority under Regulation 25(1) of

the Intermediaries Regulations issued a show cause notice to

show cause why appropriate recommendations for the alleged

violations should not be made. The designated authority

submitted an enquiry report recommending cancellation of the

certificate of registration as specified under Regulation 23 and

26 of the Intermediaries Regulations read with Regulation 28 of

the IA Regulations. Post enquiry, a show cause notice was

issued and after submitting a reply and after giving an 5

opportunity of hearing the impugned order was passed

cancelling the certificate of registration.

5. In both the orders, the charge levelled against the appellant

was found to be correct and was proved. The seriousness of the

charge is with regard to running investment advisory activity

without having a NISM certificate and carrying on fraudulent

activities by providing promising guarantee returns and for

violating Regulation 3 and 4 of the PFUTP Regulations.

6. We have heard Shri, Abhishek Mishra, CS for the

appellants and Shri Akshay Kolte Patil, the learned counsel and

Shri J. P. Sen, the learned senior counsel for the respondent.

7. With regard to the fraudulent activities, we find that

noticee no. 1 i.e. the appellant was indicating assured unrealistic

returns which lured clients to make bigger investments and

therefore the appellant did not deal with his clients honestly and

fairly and violated Regulation 15(1) of the IA Regulations. In

addition, we find that the appellant was providing assured return

to its clients for availing its services and pay advisory fee for the

same. The assured returns were proved through the emails

issued by the appellant. We are satisfied with the findings given 6

by the CGM that the appellant was engaged in providing

assured returns and making promises of assured returns which

was apparently fraudulent and, therefore, violative of

Regulations 3 and 4 of the PFUTP Regulations.

8. We also find that the appellant along with noticee no. 2

had devised a scheme to defraud the investors. In this regard,

we find that noticee no. 2 was a proprietorship firm known as

Algo System whose proprietor was the brother of the proprietor

of the appellant. This proprietorship firm Algo System was not

registered with SEBI under the IA Regulations. Evidence has

come on record to show that Algo System was using the data of

the appellant and giving unsolicited advice to the clients of the

appellant. This activity was in collusion with the appellant.

Payments from the clients were taken by Algo System and

deposited in its account which was subsequently transferred to

the account of the appellant. Further finding is, that Algo

System, apart from being unregistered was promising assured

returns. We are satisfied that the appellants had defrauded

clients in collusion with Algo System thereby violated

Regulation 15(1) of the IA Regulations and Regulations 3 and 4

of the PFUTP Regulations which does not suffer from any

manifest error of law.

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9. It was urged by the appellant that he had nothing to do

with Algo System or with the proprietor of Algo System and

that without the knowledge of the appellant, had taken the data

of the appellant and misused it and provided services to the

clients of appellant. The argument appears to be attractive but

we find that the proprietor of Algo System was the brother of

the appellant and that the bank accounts reveals that money

received by Algo System was subsequently transferred to the

bank account of the appellant. Thus, the contention that the

appellant had no knowledge of the activity being carried out by

Algo System is farfetched and cannot be believed.

10. In addition to the aforesaid, we find that the appellant was

not qualified to give any king of investment advice to the

investors in the securities market. In this regard, Regulation

6(b) and 7(2) of the IA Regulations is extracted hereunder:-

"6(b) in case the applicant is an individual, he and all persons associated with investment advice are appropriately qualified and certified as specified in regulation 7.

7(2) An individual investment adviser or principal officer of a non-individual investment adviser, registered under these regulations and persons associated with 8

investment advice shall have, at all times a certification on financial planning or fund or asset or portfolio management or investment advisory services-

(a) from NISM; or

(b) from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided such certification is accredited by NISM.:

Provided that fresh certification must be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements."

11. A perusal of the aforesaid, indicate that a person

associated with investment advice is required to be

appropriately qualified and certified, namely, he must have a

certificate on investment advisory services either from NISM or

from any other organization or institution including Financial

Planning Standards Board of India or any recognized stock

exchange of India which is accredited by NISM. In the instant

case, the appellant possessed no such certification and,

consequently, we are of the opinion that the appellant was

carrying on investment advisory services without being 9

qualified to do so. On this basis, we are of the confirmed

opinion, that the registration granted under Regulation 3 of the

IA Act was erroneous and was rightly cancelled.

12. For the reasons stated aforesaid, both the appeals fail and

are dismissed with no order as to costs.

13. This order will be digitally signed by the Private

Secretary on behalf of the bench and all concerned parties are

directed to act on the digitally signed copy of this order.

Certified copy of this order is also available from the Registry

on payment of usual charges.

Justice Tarun Agarwala Presiding Officer

Ms. Meera Swarup Technical Member

27.07.2023 PRERNA Digitally signed by

PK MANISH PRERNA MANISH KHARE Date: 2023.07.28 16:12:13 +05'30'

KHARE