2024 (8) TMI 797 - Board - SEBI

Violation of securities laws - unregistered investment advisory - activities of rendering investment advisory services or any other services had been carried out without obtaining the mandatory registration from the SEBI, as statutorily required - HELD THAT - Noticee no. 1 has admitted providing investment advisory services to at least 290 unique investors during the period March 11, 2020 to August 29, 2023 and through these activities of providing investor advisory for which no registration was obtained from SEBI, the Noticee no. 1 has earned more than INR 12 Crore as fee from the clients. As the prima facie violation on the part of the Noticee no. 1 has been established, it is to be seen as to who all are the natural persons, who are to be held liable in terms of section 27 of the SEBI Act. The activities of providing investors advisory or other activities for which registration is essential, have not stopped and are on-going. It has also noticed that the Noticee no. 4, Mr. Rahul Ananta Gosavi, who was employed with the Noticee no. 1 as Executive Assistant to CMD (since October, 2015) has become its Director w.e.f September 22, 2023. Therefore, the above two persons i.e. Noticees nos. 4 and 5 are also alleged to be liable for the acts and omissions on part of the Noticee no. 1, and further making them liable for the directions to be issued which need to be complied with by the Noticee no.1. There is nothing on record to indicate that subsequent to the resignation of Noticees nos. 2 and 3, the alleged activities of providing investment advisory has stopped, as agreements entered into by the Noticee no. 1 are long duration agreements. The prima facie observations/findings contained in this Order are made on the basis of the material available on record. In light of the alleged violations of the provisions of the SEBI Act, 1992, IA Regulations and PFUTP Regulations by the Noticees, this Order shall be treated as a Show Cause Notice under sub-section (1) of section 11, clause (d) of sub-section (4) of section 11, sub-section (4A) of section 11, sub-section (1) of section 11B, and sub-section (2) of section 11B, section 11D of SEBI Act 1992, read with clause (d) of sub-regulation (1) of regulation 11 of PFUTP Regulations, read with SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 2005, calling upon Noticees to show cause as to why following directions shall not be passed against them a) Direction to disgorge an amount equivalent to the total gains made on account of alleged unregistered investment advisory along with interest; b) Direction to restrain them from accessing the securities market and prohibiting them from buying, selling or otherwise dealing in securities for an appropriate period; c) Directions for imposition of penalty under sub-section (4A) of section 11 and sub-section (2) of section 11B read with section 15EB and section 15HB of the SEBI Act, 1992 for carrying out unregistered investment advisory activities; d) Directions for imposition of penalty under sub-section (4A) of section 11 and sub-section (2) of section 11B with section 15HA of the SEBI Act, 1992 for violation of provisions of PFUTP Regulations; and e) Directions for imposition of penalty under sub-section (4A) of section 11 and sub-section (2) of section 11B read with clause (a) of section 15A of the SEBI Act, 1992 for not providing email dump The Noticees may file their replies to SEBI within 21 days from the date of receipt of this Order and avail an opportunity of personal hearing in the matter, if they so desire. This Order is without prejudice to any other action that SEBI may initiate under the securities laws, as deemed appropriate, against the above mentioned persons/entities. This Order shall come into force with immediate effect and shall be in force till further Orders.

Summary

Issues Involved:
1. Unauthorized investment advisory services.
2. Misrepresentation and fraudulent activities.
3. Misuse of client funds.
4. Violation of SEBI regulations.
5. Liability of directors and officers.

Issue-wise Detailed Analysis:

1. Unauthorized Investment Advisory Services:
Background and Relevant Facts:
The Securities and Exchange Board of India (SEBI) conducted an inspection of Mr. Balu Motiram, an Authorized Person of a registered stock-broker, which led to the examination of Ravindra Bharti Education Institute Private Limited (RBEIPL). It was found that RBEIPL was providing stock buy/sell recommendations without mandatory SEBI registration.

Findings:
RBEIPL was acting as an unregistered investment advisor, charging substantial fees for advisory services. The company collected INR 12,03,82,130.91 from clients for these services, violating sub-section (1) of section 12 of the SEBI Act, 1992, and sub-regulation (1) of regulation 3 of the IA Regulations.

Legal Examination:
The acts of RBEIPL were prima facie found to be in violation of SEBI regulations, specifically the requirement to obtain a certificate of registration before providing investment advisory services.

2. Misrepresentation and Fraudulent Activities:
Background and Relevant Facts:
RBEIPL lured investors by projecting returns ranging from 25% to 1000%. The company executed agreements with clients, charged fees, and provided investment recommendations via emails and calls.

Findings:
The company engaged in fraudulent inducement and mis-selling of services. It advised clients to execute trades based on its recommendations, which were often recorded to comply with SEBI's 2018 Circular. The advisory activities were designed to maximize RBEIPL's profit, often at the expense of the clients.

Legal Examination:
RBEIPL's activities violated clauses (a), (b), and (c) of section 12A of the SEBI Act, 1992, and sub-regulations (a) to (d) of regulation 3, sub-regulation (1) of regulation 4, and clauses (k), (o), and (s) of sub-regulation 4 of PFUTP Regulations.

3. Misuse of Client Funds:
Background and Relevant Facts:
SEBI's examination revealed that RBEIPL collected funds from clients under the guise of fees for advisory services. The company's bank accounts showed transactions amounting to INR 12,03,82,130.91, which were not fully disclosed.

Findings:
The collected funds were used by RBEIPL for purposes other than those agreed upon with clients. The company failed to provide complete information about its advisory services and client agreements, indicating potential misuse of client funds.

Legal Examination:
The misuse of client funds and failure to provide complete information violated SEBI regulations and constituted fraudulent and unfair trade practices.

4. Violation of SEBI Regulations:
Background and Relevant Facts:
RBEIPL operated without SEBI registration, provided misleading information to clients, and engaged in fraudulent activities. The company's directors and officers were involved in these violations.

Findings:
RBEIPL's activities violated multiple SEBI regulations, including the SEBI Act, 1992, IA Regulations, and PFUTP Regulations. The company's directors and officers were held responsible for these violations under section 27 of the SEBI Act.

Legal Examination:
The violations were serious and went to the root of the regulatory framework for investment advisors. SEBI's regulations aim to protect investors' interests, and RBEIPL's actions undermined this objective.

5. Liability of Directors and Officers:
Background and Relevant Facts:
RBEIPL's directors and officers, including Mr. Ravindra Bharti and Mrs. Shubhangi Ravindra Bharti, were found to be in charge of and responsible for the company's activities. They continued to manage the company's affairs until new directors were appointed in September 2023.

Findings:
The directors and officers were held liable for the company's violations under section 27 of the SEBI Act. They were responsible for the company's unregistered investment advisory activities and fraudulent practices.

Legal Examination:
The directors and officers were deemed guilty of the company's contraventions and were subject to penalties and restrictions imposed by SEBI.

Interim Order:
Directions Issued:
1. The Noticees shall cease offering investment advisory services and desist from acting as investment advisors.
2. The Noticees are restrained from buying, selling, or dealing in securities until further orders.
3. Noticees nos. 2 to 5 are restrained from associating with any SEBI-registered intermediary.
4. An amount of INR 12,03,82,130.91 shall be impounded from Noticee no. 1.
5. Noticee no. 1 is directed to deposit the impounded amount in an Escrow Account.
6. Banks and Depositories are directed to freeze the Noticees' accounts.
7. The Noticees are directed not to dispose of or alienate any assets.
8. The Noticees are directed to provide a full inventory of all assets and bank accounts.
9. Noticees nos. 1, 4, and 5 are directed not to collect any money or fees from existing clients.
10. Noticees nos. 1, 4, and 5 are directed to remove all advertisements and materials related to unregistered investment advisory services.

Show Cause Notice:
The Noticees are called upon to show cause why the following directions should not be passed:
a. Disgorgement of unlawful gains with interest.
b. Restraint from accessing the securities market.
c. Imposition of penalties for unregistered investment advisory activities.
d. Imposition of penalties for violations of PFUTP Regulations.
e. Imposition of penalties for not providing email dump.

The Noticees may file their replies within 21 days and avail an opportunity for a personal hearing. This order is without prejudice to any other action SEBI may initiate. The order shall come into force immediately and remain in effect until further orders. A copy of the order shall be forwarded to relevant authorities for compliance.