Securities Appellate Tribunal
Capitalvia Global Research Limited & ... vs Sebi on 5 March, 2025
BEFORE THE SECURITIES APPELLATE TRIBUNAL AT
MUMBAI
DATED THIS THE 5TH DAY OF MARCH 2025
CORAM: Justice P. S. Dinesh Kumar, Presiding Officer
Dr. Dheeraj Bhatnagar, Technical Member
Appeal No. 44 of 2023
Between
1. CapitalVia Global Research Ltd.
2. Ms. Kiran Ravindra Kumar Choudhary
3. Mr. Rohit Gadia
903, B-1, 9th Floor, N.R.K. Business Park,
Scheme No. 54, PU-4, Vijay Nagar,
Indore - 452010. .... Appellants
Mr. Vedchetan Patil, Advocate for the Appellants.
And
Securities & Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. .... Respondent
Mr. Pradeep Sancheti, Senior Advocate with Mr. Sumit Yadav, Mr.
Abhay Chauhan, Mr. Atul Kumar Agrawal, Mr. D Kalyan Reddy,
Advocates i/b The Law Point for the Respondent.
2
THIS APPEAL IS FILED UNDER SECTION 15T OF SEBI
ACT, 1992 TO SET ASIDE ORDER DATED OCTOBER 19,
2022 (EX-A) PASSED BY AO, SEBI.
THIS APPEAL HAVING BEEN HEARD AND RESERVED
FOR ORDERS ON SEPTEMBER 12, 2024, COMING ON FOR
PRONOUCEMENT OF ORDER THIS 5TH DAY OF MARCH
2025, THE TRIBUNAL MADE THE FOLLOWING:
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 3 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 compliances with KYC, Risk profiling, adherence of order dated November, 11 2016 and January 20, 2017. On June 1, 2018, the SEBI shared the inspection report with the appellant and appellant filed his reply on June 19, 2018.
Thereafter, SEBI based on the findings of inspections, issued a common SCN dated September 28, 2021. In the meanwhile, the appellant filed an application under SEBI (Settlement Proceedings) Regulations, 2018 on November 25, 2021. The same was rejected and the impugned order was passed.4
3. We have heard Shri Vedchetan Patil, learned advocate for the appellant and Mr. Pradeep Sancheti, learned Senior Advocate for the respondent.
4. At the outset, Ld. Advocate for the appellant submitted that there is unreasonable delay in commencement of adjudication proceedings and barred by limitation. The inspection was conducted in July 2015 while the SCN was issued after more than 6 years in September 2021.
5. Secondly, it was submitted that vide order of WTM dated January 20, 2017 matter in relation to SCN dated September 28, 2017 has already been disposed of by the SEBI restraining the appellant for a period of 4 months from carrying out investment advisory services. Therefore, penalty under Section 15HB of Rs. 1 Crore is not justified as it amounts to double jeopardy.
6. Thirdly, it was submitted that on November 25, 2021, appellant had made application for settlement under SEBI (Settlement Proceedings) Regulations, 2018 (for short, Settlement Regulations). However, it was rejected by the SEBI by passing an ex-parte order without referring the same to internal committee or High-Powered 5 Committee, as required under the IA Regulations, 2013 (for short, IA Regulations). He pleaded that the same amounts to principles of Natural justice.
7. Fourthly, the Ld. Advocate submitted that the Inspection itself was illegal because, as required under Regulation 24 of the IA Regulations minimum 10 days' notice was not given. The notice dated June 30, 2015 was given on the day of the inspection itself i.e. on July 2, 2015. Further Regulation 24(2) mandates that if inspection is to be carried without the notice, then a separate order has to be passed, which is not done in the present proceedings.
8. In response, Mr. Pradeep Sancheti, the Ld. Senior Advocate for SEBI made detailed submissions with regard to the above-referred general grounds urged by the 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 6 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 rejection of application for settlement is expressly barred under Section 15JB(4) of the SEBI Act. Hence the said ground is meritless.
12. We have carefully considered the rival submissions made on the aforementioned general grounds.
7
13. The first objection is delay in commencing the proceedings. It is not in dispute that first inspection was conducted in 2015. Thereafter further complaints were received which led to second inspection in 2017 which revealed new facts. Hence a common SCN1 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.
14. With regard 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.
1 Show Cause Notice 8
15. With regard to ground of 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.
16. The next ground is that the 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. In view of this, 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.
17. Now we shall examine the specific grounds of the appeal taken by the appellants, challenging alleged violations of various 9 provisions of the IA regulations, keeping in 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 10 that this admission is only with respect to non-downloading of the KYC form and not in with regard to non-compliance of KYC procedure.
17.1.2 In response, Mr. Sancheti admitted that the SEBI circulars no. MIRSD/SE/Cir-21/2011 dated October 5, 2011 and MIRSD/ Cir- 26/ 2011 dated December 23, 2011 were addressed to 'SEBI Registered Intermediaries' and did not specifically cover 'Investment Advisers', as Investment Advisers were not required to be registered with the SEBI. However, in its letter dated May 19, 2014 to the appellant, while granting the certificate, it was clearly stipulated that the appellant was required to comply with the SEBI (KYC Registration Agency) Regulations, 2011 (for short Agency Regulations).
Further, it was urged that the subject contained in the SEBI Circular2 is - 'Guidelines in pursuance of the SEBI KYC Registration Agency (KRA) Regulations, 2011. Mr. Sancheti submitted that the said Regulation clearly states that,-
2 No. MIRSD/Cir- 26 /2011 dated December 23, 2011 11 "the KYC data may be uploaded by the intermediary provided they are in conformity with details sought in the uniform KYC form prescribed vide SEBI circular no. MIRSD/SE/Cir-21/2011 dated October 5, 2011".
He submitted that appellants cannot claim that the said circulars were not applicable to them. Further, appellant in its letter dated July 7, 2015, has admitted that prior to April 1, 2015, the appellant was not downloading KYC forms from KRA, which is a clear admission of Violation of Regulation 15(8).
17.1.3 In view of the above, 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 Circular3 contains guidelines in pursuance of the 3 dated December 23, 2011 12 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.
We also note that the 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.
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. 13 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 bound by all applicable IA Regulations. In particular, Regulation 16 requires documentation in respect of an illustrative list of information necessary for providing advisory services. He submitted that the appellant failed to conduct complete risk profiling as some fields were found to be empty and important details such as investment objectives were not even asked for in the questionnaire. 17.2.3 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 14 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. 17.3.1 Violation-3: Whether appellant has violated Regulation 17 requiring Suitability assessment to be made for the client before advising any product ?
Mr. Patil, Ld. Advocate for the appellant submitted that due disclosure was made by the appellants. He submitted that the product details were available on appellant's website and it was also orally communicated to the clients. He submitted that the finding recorded by the Ld. AO that appellant vide letter dated July 7, 2015 had admitted not having made complete disclosure of product details, is incorrect.
17.3.2 In response, Mr Sancheti submitted that from the perusal of website, disclosed that appellant sold its products without making Suitability assessment and risk profiling. He submitted that the contentions of the appellants that the complete product details were 15 available on the website or was communicated orally, is an afterthought.
He also submitted that the appellant vide letter dated July 7, 2015 has admitted that complete product details were not disclosed unless a client made a specific request for the same, which is a clear violation of Regulation 17 of IA Regulations.
17.3.3 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. 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 ?
16The 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. However, the Ld. AO in the impugned order, has modified the term "routine" to "monthly". It was also submitted that the Ld. AO has also failed to take note of the fact that all the relevant information is available on appellant's website 'CapitalVia'.
17.4.2 In response, Mr. Sancheti, the Ld. Senior Advocate for SEBI submitted that the Appellants had not made full disclosure in respect 17 of all material information in documents and advertising materials relating to its investment products, such as the terms and conditions of its advisory services, key high-risk features of its products, performance track record, specific disclaimers and warnings pertaining to its high-risk products. Further, with respect to the formula for performance track record, he submitted that the method of calculation used by the appellant did not take into consideration the advice provided on all the calls, and only profit-making calls have been taken into consideration.
17.4.3 We note that the appellant is required to highlight key high- risk features of the products, performance track records and specific disclaimers and warnings pertaining to high-risk product in its documents and advertising materials relating to its investment products. 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 18 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. 17.5.1 Violation-5: Whether appellant has violated Regulation 22 of IA Regulations?
The above Regulation requires Client level segregation of Advisory and distribution activities. Mr. Patil contended that there is no proof of non-segregation of advisory and distribution activity, and merely providing tips to the Broker does not amount to execution. Since appellant is not a broker, execution activities cannot be provided by it. However, on written request of some of the clients, investment 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.
1917.5.2 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 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.
17.6.1 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?
20The regulation 15(1) and 15(9) of the IA Regulations require the Investment advisor to act in fiduciary Capacity. It was submitted that the appellant had provided Investment Advice to one Mr. Mahadev Sadafule. However, when he filed a complaint on SCORES portal, the appellant instead of disputing the allegations made, decided to refund the fee to Mr. Sadafule, which does not amount to admission of default. It was submitted that the act of refund only shows that appellant desired to give quietus to the complaint. Further, disclaimers provided in the e-mails were only meant to caution the clients about the risks involved in the securities market. Mr. Patil urged that violation is presumed on the incorrect premise that Risk Profiling (RP) and Suitability assessment (SA) was not undertaken by the appellant which has no basis. It was further submitted that the risk profiling procedure was submitted to the SEBI prior to the inspection at the time of registration and no adverse observations were made by the SEBI at that time.
17.6.2 In response, Mr. Sancheti submitted that the appellant had admittedly provided Investment Advice to Mr. Sadafule without any assessment of suitability and had failed to contest the allegations 21 made by Mr. Sadafule in his SCORES complaint. It was submitted that the appellant has refunded money to Mr. Sadafule only after the complaint was filed and such an act of refunding money amounts to admission of the violation mentioned in the SCORES complaint. It was submitted that the findings against the appellants is not for making a disclaimer, but for failing to act with due care and diligence in the best interests of the clients and ensuring that its advice is offered only after thorough analysis and seeking information from its clients, and instead of putting the onus of suitability of the investment advice on the clients.
17.6.3 We find that the said Mr. Sadafule had made a complaint on SCORES platform of having suffered huge losses in respect of investment advice given by the appellant without 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 22 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 intermediaries and did not mention their applicability to Investment Advisors. The appellant was under the impression that these circulars were not applicable to Investment Advisors and the non-compliance if any by the appellant, was in good faith.
2317.7.2 Refuting appellant's plea, Mr. Sancheti submitted that the appellant had clearly violated the Regulation 19 by not maintaining proper records with respect to KYC, RP and others. In SEBI's letter dated May 19, 2014 to the appellant, it was stipulated that the appellant was required to comply with SEBI (KYYC Registration Agency) Regulations, 2011. Therefore, the plea of ignorance is untenable.
17.7.3 In our view, 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.
17.8.1 Violation-8: Whether appellant has violated clause 2 of Code Of Conduct with respect to the complaint of Mr. Mahadeo Sadafule ?
It was submitted by learned Advocate for the appellant that merely providing disclaimers in e-mails by the appellants doesn't amount to not taking fiduciary responsibility by the appellant. Moreover, the 24 disclaimers were added as per SEBI's instructions. It was further submitted that in his SCORES complaint, the client has never alleged that he has been inappropriately charged; complaint was only in relation to claim of losses and refund of remaining service fees.
The Ld. Advocate further submitted that there is no evidence to corroborate that any services were offered without risk profiling. Reference was made to finding in Para 54 and 55 of impugned order relating to Risk profile of Mahadeo, which suggests that service was provided with Risk Profile. Further, no assured returns were offered by the appellants and only expected returns were provided. It was also submitted that Ld. AO has failed to take note of the fact that the fee of Rs.24 Lakhs was not charged for only one instance but for a period of Two and half years. The appellant was aggrieved that even though by payment of refund, SCORES complaint got resolved, the refund is treated as acceptance of violation, while the same denotes that the appellant had acted in fiduciary capacity. 17.8.2 In response, Mr. Sancheti submitted that under 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. 25 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 of its clients. Accordingly, we hold this point in the negative. 26 17.9.1 Violation-9: Whether appellant has charged excess fee in violation of Clause 6 of Code Of Conduct, under Schedule III of IA Regulations, 2013 ?
Learned Advocate for the appellant submitted that the fees charged from 43 clients mentioned at Para 60 of the Impugned order was collected over a period of time and no client has made any complaint regarding exorbitant fee. Further, till April 2021, there was no ceiling on the quantum of fee charged by an Investment Advisor. He further submitted that the Ld. WTM in the order dated January 20, 2017 has found that it is 'not proved' that the appellant has charged exorbitant fee and observed that CapitalVia needs to be far more responsible in calibrating its fee structure, to make it consistent across products and clients, keeping into account the amount under the scope of investment advice. The Ld. AO without any new facts has concluded that this would amount to breach of Clause 6 of COC. 17.9.2 In response, Mr. Sancheti submitted that clause 6 of Schedule III of the Code of Conduct of IA Regulations clearly cast a duty on the Appellants to charge a fair and reasonable fee from its clients, 27 which has not been done in the present case. It was submitted that excessive fees was charged from 43 clients, as mentioned at Para 60 of the Impugned order. As appellant's product policy, none of the products offered by the appellant had an advisory fee of more than Rs. 1 lakh, except the HNI product which had a fee of Rs. 3,20,000. However, the Appellant had collected fee of Rs. 5,00,000 or more from 43 clients.
With respect to the appellants' contention that the fees have been charged for several products and over a period of time and not at one shot, Mr. Sancheti submitted that even if the price of all the products for 12 months is added, the same comes to Rs. 13,50,500 only, however, the appellant has charged fee as high as Rs. 34,55,000 from Mr. Dhaval Ji and Rs. 20,56,555 from Mr. Ganesh Chakravarti, two of its clients.
With regard to appellant's contention that Mr. Sadafule was charged advisory fee of Rs. 25 lakh for a period of two and half year, Mr. Sancheti submitted that it is not supported by any evidence. No prudent client would make an advance payment of fee for 2 and half year, which is much more than the investment made. Mr. Sancheti 28 submitted 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. 29 17.10.1 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 ?
With regard to the above allegation, Mr. Mr. Patil submitted that various Websites listed by the appellant were only for lead generation and no actual advisory business was done through them and these were at best landing pages. Clause 5 of Code of Conduct applies to clients only and not to prospective clients. It was further submitted that people who landed on appellant's website through lead generating websites were not even prospective clients, though they may later become prospective clients and contended that the allegation is baseless.
17.10.2 In response, learned senior advocate for the respondent submitted that appellant has violated clause 2 of the Code of Conduct as during the inspection, it was found that the appellant was using various websites for soliciting clients and the details of the same were not provided to the SEBI at the time of registration. 17.10.3 Records do not disclose any evidence to substantiate the allegation that the appellant was using various websites to solicit 30 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.
17.11.1 Violation-11: Whether appellant has violated Regulation 7(2) of IA Regulations relating to Qualification of IA ? On the above aspect, it was submitted by the Ld. advocate for appellant that certification requirements are governed by the SEBI Certification of Associated Persons in Securities Market Regulations, 2007. As per the Regulation 3 of these Regulations, respondent Board has to give a time of 2 years to the existing investment advisors for compliance. He submitted that appellant has fully complied with following requirements.
1. NISM X-A (level 1): Notification dated June 19, 2013 (Compliance to begin from June 19, 2015). Inspection was 31 conducted on 2nd July, 2015 and all advisors had duly qualified Level-1, as recorded in Para73 of impugned order.
2. NISM X-B (level 2): Notification dt. January 27, 2014 (Compliance to begin January 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 32 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 appellant has violated Regulation 13(c) ?
Learned Advocate for the appellant submitted that the words 'investment adviser' with the name of appellant were added immediately after inspection by the SEBI. He contended that absence of those words did not have any impact on the market at large.
17.12.2 Refuting appellant's arguments, Mr. Sancheti, -submitted that the Appellant cannot choose to follow a provision of law on the basis of his assessment as to whether it would impact the market or not. It was 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 Hon'ble Supreme Court in the case of Chairman, SEBI vs. Shriram Mutual Fund [(2006) 5 SCC 361], in which it was held that 33 penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and Regulation is established. 17.12.3 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. 17.13.1. Violation-13: Whether appellant has failed to make disclosure in terms of Clause 1 of COC?
On the above aspect, Mr. Patil submitted that the details on websites were edited as per SEBI's advice during inspection held in 2015 itself. He submitted that appellant had computed entire staff as 'Advisory Team' as at the relevant time they were involved in IA business. Thus, details of sales and support staff were also shown to be part of Advisory team. It was also contended that the number of Clients were not updated on a daily basis.
17.13.2 In response, it was submitted by learned senior advocate Mr. Sancheti that appellant's website mentioned 750+ trend advisers. Appellant in its letter dated July 7, 2015 admitted that out of 750 34 employees only 60 were part of advisory team. Appellant in its reply to SCN dated January 25, 2022 has admitted that it had no physical offices in Singapore and USA, which is contrary to the claims made on the website.
It was also submitted that the appellants have admitted that details of number of clients was not updated. Thus there is clear violation of disclosure norms namely Clause 1 of COC.
17.13.3 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. 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 35 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 adverse impact on the integrity of the market. It was submitted that even on subsequent inspections carried out for the period from April 1, 2016 to September 11, 2017 and April 1, 2020 to March 31, 2021, Appellant was found violating the provisions. In view repeated nature of violations, the quantum of the penalty is justified in terms of section 15-J. He submitted that the AO has examined the violations in the light of the applicable regulations as on the date violation actual violation. Reproduction of erstwhile regulations could be at best an inadvertent typographical error.
18.3 It is relevant to note that the IA Regulations were prescribed in 2014. By then, appellant was already in the business of providing 36 investment advisory services. As noted hereinabove, appellant has indulged in multiple and repeated violations. AO has examined the violations in the light of the applicable regulations only. Mr. Sancheti is right in his submission that reproducing extracts of 2020 regulations in the impugned order, is a typographical error. 18.3.2 For the purpose of 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.
19. In the result, the following:-
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ORDER i. The appeal is partly allowed. The impugned order is modified by reducing the penalty to Rs. 70 Lakhs. ii. No costs.
Justice P. S. Dinesh Kumar Presiding Officer Dr. Dheeraj Bhatnagar Technical Member 05.03.2025 MRS PRAMILA Digitally signed by MRS PRAMILA Date: 2025.03.05 17:11:12 +05'30' PTM