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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 ..... s 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. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull 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 - W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umit Yadav, Mr. Abhay Chauhan, Mr. Atul Kumar Agrawal, Mr. D Kalyan Reddy, Advocates i/b The Law Point for the Respondent. ORDER [Per: Dr. Dheeraj Bhatnagar, Technical Member] This appeal is directed against order dated October 19, 2022 passed by Adjudicating Officer imposing a penalty of Rs. 1 Crore on the appellant under section 15HB of the SEBI Act for violation of Regulations 7(2), 15(8), 16, 17, 18, 19, 22, 13(c), 15(1), 15(9) of SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as 'IA Regulations') and Clause 1, 2, 4, 5 & 6 of Code of Conduct under Sch. III of IA Regulations, 2013. 2. Brief facts of the case are as under: * SEBI received a complaint 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant as under: 9. With regard to appellants' plea of unreasonable delay in commencement of Adjudication Proceedings, he submitted that the Appellants have failed to prove that they have suffered any prejudice due to the delay. The violations committed by the appellants are not technical but are grave in nature and go the core of the conditions on the basis of which registration is given to an Investment Advisor. It was contended that a large number of complaints were received from appellants' clients over a period of time. He submitted that since the appellants have admitted most of the violations vide their letter dated July 7, 2015, the ground with regard to the delay 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view rival submissions, as under: 17.1.1. Violation-1 : Whether appellant has violated Regulation 15(8) of the IA Regulations (KYC Procedure)? It was submitted that the appellant was under the impression that the circulars dated October 5, 2011 and December 23, 2011 were not applicable to the appellants as they are applicable to SEBI registered intermediaries and not to the Investment advisors. That the circular dated December 23, 20211 dealing with registration in KRA was issued only to 7 specific intermediaries. Hence, the same was not applicable to the appellant. Mr. Patil also submitted that the non- compliance was not intentional. It was further contented that during 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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. 17.2.1 Violation-2: Whether appellant failed to carry out Risk profiling (RP) and violated Regulation 16? Mr. Patil submitted that an incorrect conclusion was drawn that the appellant has admitted the violation vide letter date July 7, 2022. He urged that while replying the SCN, vide letters dated March 7, 2014 and March 10, 2014, appellant filed detailed submissions and the Risk Profile prior to the inspection. But the same were not considered by the Ld. A.O. The risk profile 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 boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 17.4.1. Violation-4: Whether appellant has violated Regulation 18 read with clause 5 of Code Of Conduct under Schedule III of IA Regulations, 2013? The above Regulations require an investment advisor to make requisite disclosure to its clients. It was urged by the Ld. Advocate for the appellant had duly disclosed material information to clients. It was submitted that learned AO has wrongly concluded that the method disclosed by the appellant leads 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment advice was directly provided to brokers and it was the brokers who used to provide execution services to clients and not the appellant. It was further submitted that even if this is considered to be execution, appellant has not charged any fee for such execution in breach of "arm's length relationship". Mr Patil further submitted that the findings of the AO were drawn based on an undated letter received by SEBI on July 7, 2015. 17.5.2 In response, Mr. Sancheti submitted that the appellant had already admitted in its letter received by the SEBI on July 7, 2015 that some of its executives were directly in conversation with the brokers of the clients and were issuing trading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout any assessment of suitability of their advice for him. 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. 17.7.1 Violation-7: Whether appellant has violated Regulation 19? The above Regulation requires Maintenance of Records of copies of agreements with clients. In 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Clause 2 of Code of Conduct, appellant while advising its clients was required to act with due skill, care and diligence in the best interest of its clients. The complainant Mr. Sadafule was charged an exorbitant fee of Rs. 25 lakh for an assured return of 10%, who relying on the investment advice of the appellant, suffered huge losses. It was further submitted that as per risk profiling of Mr. Sadafule, it is clear that he intended to invest only Rs. 6 to 10 lakhs, for which he was charged huge amount of fee. 17.8.3 Admittedly, the complaint Mr. Sadafule has not alleged that he has been inappropriately charged and his complaint was only in relation to claim of losses and 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the findings of Ld. AO that Mr. Sadafule had intended to invest only amounts in the range of Rs. 6-10 Lakhs is correct, as the same is evident from Risk Profiling document. It was also submitted that acting on the advisory service of the appellant, Mr. Sadafule suffered huge losses. 17.9.3 We note that the 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. 17.10.1 Violation-10: Whether appellant is guilty of soliciting of client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anuary 27, 2016). Investment Advisors of Appellant had further time available to comply with it. He submitted that the AO has failed to take into consideration, the relevant Regulations and Notifications and not correctly noted the date of joining of the employees. No data on date of joining of each employee was collected by the Ld. AO. 17.11.2 In response, Mr. Sancheti submitted that the Appellant cannot dictate as to what course or curriculum prescribed for a market participant is beneficial or relevant for the market. He submitted that the compliance made post-inspection shall not absolve the appellant for violation committed before Inspection. 17.11.3 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. 17.12.1 Violation-12: Whether app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18.1 The Ld. Advocate for the appellant submitted that maximum penalty leviable under Section15HB of Rs 1 Crore has been imposed on the appellant without proper application of mind and the same is grossly disproportionate. He urged that while levying the penalty, relevant provisions of the IA regulations, prevailing at the time of inspection, i.e. 2015 ought to have been taken into consideration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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