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TMI Blog2025 (3) TMI 1256X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinafter referred as RA Regulations), whereby respondent has suspended his R.A. Certificate for six months. The Appeal No. 730 of 2023 is against the order of the SEBI whereby penalty under various provisions of the SEBI Act have been imposed on the appellant, including the penalty under Section 15A(c) of Rs. 5 lakhs; under Section 15EB of Rs. 40 lakhs; and under Section 15HA amounting to Rs. 15 lakhs. 2. Brief facts of the case are as under: 2.1 Respondent SEBI carried out an inspection of the appellant for the period April 01, 2020 to March 31, 2021. As per appellant's disclosure in the pre-inspection questionnaire, the appellant disclosed about performing the various business activities in this personal capacity, under the following divisions:- (a) Chartered Accountancy Division; (b) Spiritual / Vipassana Teaching Division; (c) Manish Goel News Broadcast Division; ("MGNBD"); and (d) Research Analyst Division ["RA"], registered with the SEBI) with effect from w.e.f. December 16, 2021. In addition, Mr. Goel was in control of Multibagger Securities Private Limited, a SEBI registered Investment Advisory Company ("MSPL") in which he was Promoter/Director/ Principal Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d later. The respondent has alleged that the appellant had failed to act with due care, skill and diligence required by the research analyst in terms of Regulation 25(1) and Clauses 2, 6, 7 and 8 of the Code of Conduct as specified in Third Schedule under Regulation 24(2) of the RA Regulations. 4.1.2 In response, with regard to the violation 1, the appellant submitted that the appellant has duly maintained research reports which were signed and dated. It was submitted that the allegation is based on the question nos. 18, 19 and 20 of the pre-inspection questionnaire pertaining to research work of the appellant and in such questions, the respondent did not ask for the rationale. On the other hand, the appellant himself provided the rationale as Annexure-II to the reply to the show-cause notice. 4.1.3 With regard to the alleged violation 2 of not maintaining records of 'public appearance' it was submitted that Regulation 25(1) of the RA Regulations only mandates "to maintain the record of public appearance". According to the appellant, the term implies keeping records with respect to timing of research recommendations given and whether the said recommendation was for buy/sale/hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt or other documentation that contains the required applicable disclosures and that the research analyst appearing at the event corrects and updates during the public appearance any disclosures in the research report that are inaccurate, misleading or no longer applicable." (Emphasis supplied] It was submitted that the appellant's explanation is contrary to the above specific provisions. 4.1.4.3 We have carefully considered the rival submissions and find no merit in appellant's contention that publishing the research report on Whatsapp/Telegraph channels does not amount to "Public appearance". In our considered view, the definition of the term "Public appearance" under Regulation 2(1)(q) of the RA Regulation includes making recommendations/rendering advice relating to securities, on Whatsapp/Telegram channels, in respect of which the appellant is required to make applicable disclosures. We note that the appellant does not maintain any records, whatsoever, in respect of the publication on Whatsapp/Telegram groups, of the research reports/ recommendations. 4.1.4.4 In view of the above, we uphold the order of the AO of imposing of penalty under Section 15A(c). Considering multip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 4.2.3 In our considered view, as per the explicit definition of the provisions of Regulation 15, a Research Analyst or Research entity 'shall have' written internal policies and control procedures. In terms of sub-regulation (2) thereto, a Research Analyst or Research entity 'shall have in place' appropriate mechanisms, to ensure its research activities independent and separate from its other business activities. In view of this, the appellant is clearly required to have appropriate mechanisms to ensure independence of his research activities. Undisputedly, he is carrying on other business activities in his individual capacity. The same was required to be reported to the respondent at the time of registration and if there was any change, the same affects the independence of his 'research analyst' function qua his other businesses, which may create conflict situations, as seen in the case of the appellant. Therefore, failure to report change in Internal policy has rightly been held as violation of the relevant regulation by the respondent. In view of the same, the appellant's submission is untenable and it is rejected. 4.3. Re. : Violation-4 [Failure to ensure independence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asting the research recommendations (which are made available free by RA division). Thus, services in all these verticals are singularly provided by the appellant only. In addition, as the Principal Officer of MSRAPL, admittedly being the only person in the Company, he provides investment advisory services by collecting fee. Though MSRAPL is a Company with separate existence, the appellant has full control over it and vested with powers to take decisions for the company, being the Principal Officer of the company and having 80% shareholding therein. The remaining 20% shareholding too is in the name of his own brother. There is no other employee of the Company, who performs/ assists in the said investment advisory functions. In appellant's own admission, all advisory decisions for the investment advisory functions are taken by him. 4.3.5 Under the circumstance, it is not logical to assume that the appellant can rationally maintain arm's length in his brain for carrying out analytical functions for RA business qua investment advisory business of MSRAPL and other business activities carried out in individual capacity. The appellant's claim that as an RA, he provides free Research r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d but against all canons of mercantile and income tax law"(Para 10). In view of the ratio of the above decision that 'no one can make profit with himself', it is logical to arrive at the reasoning that 'no arm's length relationship is possible within different proprietary advisory activities of the same individual', since an individual has no separate existence from himself. 4.3.7 In our considered view, arm's length criteria could be applied to only relationship between two distinct persons i.e. between two individuals or between an individual and a HUF, or between a Company and a Firm etc. By no stretch of imagination, an arm's length relationship can be construed within the same 'individual'. Hence, we uphold the finding of the respondent that the appellant failed to make arm's length between his RA functions and other functions. Secondly, the argument that the SEBI has given the investment advisory certificate and RA certificate both to the appellant is also incorrect on facts, since the investment advisory certificate was issued to an entity titled MSRAPL (a Company) whilst the RA Certificate was granted to the appellant in his proprietary capacity as an 'individual'. Moreov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls within the Chapter 3 (Management and disclosure requirement) puts limitation on own trading by the RA. The underlying objective of the Regulation is to avoid conflict of interest by placing embargo during the prescribed period on trading in a specific security by an RA, in respect of which he made a specific recommendation. For this purpose, under Regulation 2(1)(h), RAs have been classified in two broad categories, namely; (1) Independent Research Analyst; and (2) 'employed as research analyst by a research entity'. Their associates also fall in the corresponding same categories. 4.4.6 Regulation 2(1)(h) reads as under: "(h) "independent research analyst" means a person whose only business activity is research analysis or preparation and/or publication of research report;" The above provision requires an independent research analyst to do only business activity of 'research analysis or preparation and/ or publication of research report', whereas, it is evident that the appellant has been carrying on several business activities in his individual capacity, which shall have a bearing on his independent functioning as an independent research analyst. 4.4.6 Undisputedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment Trust of India' prepared by the appellant reached the client and why the same was not duly disclosed by him. The fact remains that the report has reached the client. Under the circumstances, we find his explanation with respect to violation of disclosure requirement under Regulation 19 as unsatisfactory. 4.5.4 Regarding the second allegation, we find that in terms of the RA Regulations 21(1), the appellant was required to make disclosure in respect of his registration status and details of financial interest in the Company. The screenshots of Telegram Channels provided by the respondent show that no such disclosure was made by the appellant regarding his RA number or financial interest in securities in respect of which recommendations were made. The appellant questioned the authenticity of such screenshots. This contention is wholly untenable because screenshots are from appellant's phone. 4.6 Re. : Violation-7- [Failure to maintain any record of rationales.] 4.6.1 It has been alleged under regulation 18(7), 20(1) read with the code of conduct, the appellant has failed to maintain any record of rationales in respect of 16 out of 19 stock specific recommendations made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch recommendations/ reports as a Research Analyst on the Whatsapp/Telegram group chats. 4.7.3 Appellant's stand is that he did not furnish any KYC details on the ground that he was not taking money from any client through RA division and that it was MGNBD division that was operating the whatsapp/Telegram groups and charging fee. In view of this and since seeking KYC details did not fall within the scope of SEBI from a RA, the appellant was not bound to collect KYC details. 4.7.3.1 With regard to the allegation that he collected Rs. 4,16,16,669/- from 583 clients during the inspection period from April 01, 2020 to March 31, 2021, the appellant has given the following two explanations: (1) Such receipts do not pertain to Research Analyst division as the appellant in his individual capacity solicits clients/fees in three other divisions, namely, CA Division, Vipassana Teaching Division, MGNBD and in MGRAPL for investment advisory functions and hence such income cannot be attributed to Research Analyst division. (2) That the allegation is based on the ground that the appellant had opened one payment gateway account, namely, Instamojo, based on his Research Analyst Registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from his specific authorised telephone number. The respondent at every stage and even at the appellate stage asked the appellant to furnish details of the telephone number and the appellant has not denied the contents of the Whatsapp chat, which admittedly contains specific recommendations made by him with respect to the recommendations for 9 stocks. Further, the appellant failed to submit any proper documentary evidence to show that he had complied with the aforesaid regulatory requirements. In view of this we find no merit in the plea of the appellant, in respect of this violation. 5. Keeping in view the fact that the defaults made by the appellant of the RA Regulations are multiple and repetitive and lack any credible explanation, we hold that the quantum of penalty levied by the AO is justified in view of the provisions of Section 15J of the SEBI Act. III. PENALTY UNDER SECTION 15HA (Rs. 15 LAKHS) 6. It is alleged that the appellant had continued violation of Regulation 3(a), (b),(c) and (d) and 4(1) and 4(2)(k),(o) and (s) of PFUTP Regulations read with Sections 12A(a),(b) and (c) of the SEBI Act and Regulation 2(1)(c) of PFUTP Regulations and Clauses 1,2,6,7 and 8 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 years' high without supported by any research. Mr. Rai argued that the offer of providing one free recommendation amounts to luring the clients. It was submitted that such schemes are misleading, since assurance of return is not possible in a free and dynamic market and submitted that the appellant had failed to act with honesty with due care and diligence and failed to observe high professional standards. 6.4 On careful consideration of the facts of the case, we find that the appellant has not denied violation in respect of one scrip i.e. Swasti Vinayak Synthetics Ltd. in respect of which the recommendation through Whatsapp message of assured high returns was made with the offer of one free service. The same undisputedly, falls within the scope of Regulation 4(2)(k) of the PFUTP Regulations, amounting to furnishing of misleading information. Keeping in view the above, we uphold the action of the AO imposing a penalty of Rs. 15 lakhs under Section 15HA. 7. In Appeal No. 931 of 2023, the appellant has challenged cancellation of the certificate as registered research analyst under the RA Regulations for six months. Since that period is over, the appeal is rendered infructuous. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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