2021 (5) TMI 86 - HC - SEBI

Court upholds SEBI regulations on Investment Advisers' fees, dismissing excessive delegation claims.

The court upheld the constitutional validity of Regulation 15A of the SEBI (Investment Advisers) Regulations, 2013, and Paragraph 2(iii) of the SEBI ... Investment Adviser entitled to charge fees for providing investment advice from a client in the manner as specified by the Board - Constitutional validity of Regulation 15A of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 which was inserted by Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020, as also the consequential paragraph 2(iii) of the SEBI Circular dated 23 September 2020 - HELD THAT:- Under section 19 of the SEBI Act, the SEBI is empowered to delegate its powers and functions by general or special order in writing to any member, officer of the SEBI or any other person subject to such conditions as specified by SEBI. Accordingly, the SEBI had issued SEBI (Delegation of Statutory and Financial Powers) Order, 2019 dated 31-07-2019 delegating various powers and functions to the members and officers of the SEBI, as approved by the Board. The said Delegation of Power Order is annexed at Exh.C to the Additional Affidavit-in-Reply - In Clause 3(2) of the Delegation of Power Order, the powers and functions delegated to any member or officer of the Board or authority under this Order may be exercised by any officer or authority, higher in grade or rank or position to the Deputy General Manager. The impugned Circular has been signed by Mr.Naveen Sharma, the General Manager in the Investment Management Department, who is stated in rank higher than the Deputy General Manager. In the circumstances, Mr.Naveen Sharma would be well within his authority to sign the impugned Circular issued under the SEBI Act. As stated earlier, SEBI is an expert regulatory body established under the SEBI Act and the Court, therefore, would have to exercise judicial restraint and the scope of interference would be extremely narrow. The Court cannot substitute own views in place of views of the expert body. Moreover, it is well settled that the Court should be very slow in staying a law by way of interim relief when the constitutional validity of the law is challenged. As noticed that the power to specify a ceiling on the fees exists in the IA principal 2013 Regulations much before the insertion of the impugned Regulation 15A. Regulation 15(9) under Chapter-III “General obligations and responsibilities” of the impugned IA principal 2013 Regulation makes provisions for Code of Conduct of an Investment Adviser. In view of the above discussion, the prayer for interim relief shall stand rejected. The hearing of the Petition is expedited. Issues Involved:1. Constitutional validity of Regulation 15A of the SEBI (Investment Advisers) Regulations, 2013.2. Validity of paragraph 2(iii) of the SEBI Circular dated 23 September 2020.3. SEBI's authority to prescribe fees charged by Investment Advisers.4. Allegation of excessive delegation and violation of fundamental rights under Articles 14, 19(1)(g), and 21 of the Constitution.5. Validity of the impugned Circular issued by the General Manager of SEBI.Issue-wise Detailed Analysis:1. Constitutional Validity of Regulation 15A of the SEBI (Investment Advisers) Regulations, 2013:The petitioner challenged the constitutional validity of Regulation 15A, which allows SEBI to specify the manner in which Investment Advisers (IAs) can charge fees from clients. The petitioner argued that SEBI lacks the authority under the SEBI Act to prescribe such fees, asserting that this regulation violates the fundamental rights under Articles 14, 19(1)(g), and 21 of the Constitution. The court, however, found that SEBI has sufficient powers under Sections 11 and 30 of the SEBI Act to issue the impugned regulations, thus upholding the regulation's validity.2. Validity of Paragraph 2(iii) of the SEBI Circular dated 23 September 2020:The impugned Circular specifies fee structures for IAs, including caps on fees under both 'Assets under Advice (AUA)' mode and 'Fixed fee' mode. The petitioner argued that the Circular is arbitrary and lacks a rational basis. The court noted that the Circular was issued following a due process, including public consultation and approval by SEBI. The court also found that the Circular's provisions are reasonable and serve the public interest, thus rejecting claims of arbitrariness.3. SEBI's Authority to Prescribe Fees Charged by Investment Advisers:The petitioner contended that SEBI does not have the power to prescribe fees for IAs. The court, however, referred to Sections 11 and 30 of the SEBI Act, which empower SEBI to regulate the securities market and protect investors' interests. The court held that these sections confer sufficient authority on SEBI to issue regulations concerning the fees charged by IAs, thereby validating SEBI's regulatory actions.4. Allegation of Excessive Delegation and Violation of Fundamental Rights:The petitioner argued that prescribing fee rates is a legislative function and that the impugned regulations constitute excessive delegation. The court, however, emphasized that SEBI is a statutory authority with expertise in securities market regulation. It held that the regulations are reasonable restrictions in the public interest, permissible under Article 19(6) of the Constitution. The court also applied the five tests from the Supreme Court's judgment in Internet and Mobile Association of India v. RBI and found that the impugned regulations satisfy these tests, thus dismissing claims of excessive delegation and violation of fundamental rights.5. Validity of the Impugned Circular Issued by the General Manager of SEBI:The petitioner questioned the authority of the General Manager to issue the impugned Circular. The court referred to SEBI's Delegation of Statutory and Financial Powers Order, 2019, which authorizes officers, including the General Manager, to issue such Circulars. The court found that the Circular was issued within the scope of delegated authority, thus affirming its validity.Conclusion:The court concluded that SEBI has the necessary authority under the SEBI Act to issue the impugned regulations and Circulars. The regulations and Circular were found to be reasonable, serving the public interest, and within SEBI's regulatory powers. The petitioner's claims of excessive delegation and violation of fundamental rights were dismissed, and the request for interim relief was rejected. The hearing of the petition was expedited.