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2025 (3) TMI 1145 - AT - SEBIPenalty u/s 15HB of the SEBI Act - delay in commencing the adjudication proceedings against the appellant - HELD THAT - A common SCN 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 show cause notice which reduces multiplicity of proceedings. It is settled that where no limitation is prescribed proceedings have to initiated in a reasonable period. Further as rightly urged by Mr. Sancheti appellants have failed to demonstrate any prejudice caused due to the delay. Considering the avowed object of IA Regulations we find no merit in ground of delay taken by the appellant. Double jeopardy SEBI is right in contending that the proceedings before WTM and the AO are completely different under different provisions of the SEBI Act. Therefore is no merit in this ground. Denial of natural justice in rejecting the settlement application as rightly contended by Mr. Sancheti an appeal against rejection of application for settlement is barred under Section 15JB(4) of the SEBI Act. Hence this ground is also untenable. Notice for inspection was served on the day of the inspection - We note that the impugned proceedings were started following several complaints received against the appellants. The appellant being a registered Investment advisory firm was required to abide by the IA Regulations but on inspection in 2015 and later in 2017 it was found to be lacking on several counts. We are persuaded to accept SEBI s contention that Appellants have not demonstrated any prejudice caused to them. Moreover during proceedings appellants were given opportunity to defend their cause. Hence this ground is also baseless. Violation-1 - Whether appellant has violated Regulation 15(8) of the IA Regulations (KYC Procedure) ? - We are of the vies that the appellant has not complied with the conditions laid down by the SEBI while granting Certificate of Registration as an investment adviser conveyed vide letter dated May 19 2014. Further even prior to coming into operation of the IA Regulation 2013 appellant was covered by the SEBI circular dated December 23 2011 which was addressed to SEBI registered intermediaries even though the same did not specifically use the nomenclature investment adviser . Further SEBI s Circular (dated December 23 2011) contains guidelines in pursuance of the SEBI KYC Registration Agency (KRA) Regulations 2011 which required the appellant to upload the KYC data in conformity with details sought in the uniform KYC Form prescribed in the SEBI Circular dated October 5 2011. It is clear that the appellant has failed to comply with the same. Appellant vide letter dated July 7 2015 has admitted that prior to April 1 2015 it was not downloading KYC Forms from KRA. Therefore we find no merit in appellant s ground and hold this point in the affirmative. Violation-2 - Whether appellant failed to carry out Risk profiling (RP) and violated Regulation 16? - 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 shared details of one party but the SEBI s findings are based on the evidence recorded at the time of inspection which remained uncontested. In view of this we don t find no merit in appellant s contention and this point is also held in the affirmative. Violation-3 - Whether appellant has violated Regulation 17 requiring Suitability assessment to be made for the client before advising any product? - Appellant s contention that product details were available on the website is not refuted by the SEBI. However appellant did not carry out specific Suitability Assessment for individual clients before advising any product. This could have exposed the clients to serious risk. Moreover admittedly the complete product details were not disclosed by the appellant until a client made a specific request for the same which is a clear violation of Regulation 17 of IA Regulations. Hence we hold this point also in the affirmative. Violation-4 - Whether appellant has violated Regulation 18 read with clause 5 of Code Of Conduct under Schedule III of IA Regulations 2013? - On careful consideration we find that the appellant did not make full disclosure in respect of all material information about all terms and conditions on which services are offered. We find that the appellant s explanation with regard to the finding of the inspection that the method of calculation used by the appellant for assessing performance track record did not take into account advices provided on all the calls but covered only such calls which were profit-making is not satisfactory as it does not give correct picture to the clients about the products offered. Therefore we find no merit in appellant s contention and hold this point also in the affirmative. Violation-5 - Whether appellant has violated Regulation 22 of IA Regulations? - 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. 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? - Admittedly Appellant has not contested the complaint and refunded made by the refund only after complaint was filed. We are unable to persuade ourselves to accept appellant s contention that appellants non-contest and refund of money should not be construed as admission of violation. Such violations cause serious prejudice and loss to the clients in Securities market. Hence in view of appellant s such conduct we hold this point also in the affirmative. Violation-7 - Whether appellant has violated Regulation 19? - Though the Investment advisor Regulations were notified in 2014 Investment advisors are certainly Intermediaries to covered within the broad definition of Intermediaries even prior to issuance of Regulations. Accordingly this point is also held in the affirmative. Violation-8 - Whether appellant has violated clause 2 of Code Of Conduct with respect to the complaint of Mr. Mahadeo Sadafule? - 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. Violation-9 - Whether appellant has charged excess fee in violation of Clause 6 of Code Of Conduct under Schedule III of IA Regulations 2013? - Risk Profile document shows that Mr. Sadafule wanted to invest Rs. 6-10 lakhs but he was charged Rs. 25 lakh as advisory fee which is unreasonably high even if it is for a period of two and half years as claimed by the appellant. No prudent client would make an advance payment for two and half year which is much more than the amount of investment made. The appellant 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. 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? - Records do not disclose any evidence to substantiate the allegation that the appellant was using various websites to solicit clients. We find merit in appellant s contention that various websites some of which had the domain name capitalvia.com were for lead generation and no business is done through them and these are only landing pages. These websites were used to track any prospective client. Hence in our view in the absence of any material against the appellant the allegation is baseless. Accordingly we answer this point in the negative. Violation-11- Whether appellant has violated Regulation 7(2) of IA Regulations relating to Qualification of IA? - We find that no 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. Violation-12 - Whether appellant has violated Regulation 13(c)? - As 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 to the decision of Chairman SEBI vs. Shriram Mutual Fund 2006 (5) TMI 191 - SUPREME COURT in which it was held that penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and Regulation is established. Appellant s contention that the words were added after inspection do not merit any consideration in the light of settled position of law laid down in Shriram Mutual Fund (supra). Accordingly we answer this point in the affirmative. Violation-13 - Whether appellant has failed to make disclosure in terms of Clause 1 of COC? - We note that the appellant has admitted that it had construed all the staff as under the category of Investment Advisor . Incorrect disclosure on the website is misleading to any one and particularly the potential clients. We find no substance in appellant s contention and accordingly hold this point in the affirmative. Determination of quantum of the penalty - We note that there were repeated violations of multiple nature. Further large number of complaints were received by the respondent against the appellant investment advisory firm which could have had serious impact on the integrity of the securities market and adversely affected the interest of the investors. In view of this keeping in view the criteria indicated in Section 15-J levy of penalty is justified. However since we found merit in the plea of the appellant on some of the grounds and we have answered 4 out of 13 violations in the negative. Therefore levying maximum amount of penalty of Rs. 1 Crore is unsustainable. In our view ends of justice would be met by reducing the penalty to Rs. 70 lakhs.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Delay in Commencement of Proceedings The appellant argued that there was an unreasonable delay in the initiation of proceedings, as the inspection was conducted in 2015 but the SCN was issued in 2021. The Court found that although there was a delay, the appellant failed to demonstrate any prejudice caused by it. The Court noted that multiple complaints were received, leading to further inspections, and the issuance of a common SCN was justified to reduce multiplicity of proceedings. Double Jeopardy The appellant contended that the penalty imposed amounted to double jeopardy, as a previous order had already restrained the appellant from providing advisory services. The Court held that the proceedings before the WTM and the AO were distinct, with different legal bases, and thus, the argument of double jeopardy was without merit. Violation of Natural Justice The appellant claimed that the rejection of their settlement application violated natural justice principles. The Court noted that an appeal against the rejection of a settlement application is barred under Section 15JB(4) of the SEBI Act, rendering this ground untenable. Legality of Inspection The appellant argued that the inspection was illegal due to inadequate notice. The Court found that the inspections were justified given the complaints received and that the appellant did not demonstrate any prejudice from the lack of notice. The opportunity to defend was provided during the proceedings. Violation of IA Regulations
3. SIGNIFICANT HOLDINGS The Court concluded that while the appellant committed multiple violations, the penalty imposed was disproportionate. The Court reduced the penalty from Rs. 1 Crore to Rs. 70 Lakhs, considering the merit found in some of the appellant's arguments. The Court emphasized the importance of maintaining market integrity and the protection of investors' interests.
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