2021 (7) TMI 168 - HC - SEBI

SEBI's Authority to Regulate Investment Advisor Fees Upheld

Purnartha Investment Advisers Private Limited Versus Securities and Exchange Board of India & anr.

The Court upheld the constitutional validity and authority of SEBI to regulate fees charged by Investment Advisors under Regulation 3(XII) of the SEBI ... Modes of charging fees to clients by Investment Advisors - Constitutional validity and vires of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020 (“Amendment Regulations”), by which Regulation 15A was inserted into the Securities and Exchange Board of India (Investment Advisors) Regulations, 2013 and Circular issued in pursuance thereof, being Circular Reference No. SEBI/HO/IMD/DF1/CIR/P/2020/ 182 dated 23.09.2020 challenged - whether the Board has the requisite authority under the SEBI Act, in the first place, to make regulations concerning charging of fees by Investment Advisors from their clients? - challenge is on the footing of both want of legislative power in SEBI (by delegated authority) to make a provision such as regulation 15A or to issue a Circular such as Circular dated 23.09.2020 and breach of fundamental right of Investment Advisors to carry on a profession of their choice by enacting unreasonable restrictions - HELD THAT:- As specifying measures for protection of investors and development and regulation of securities market being the duty of the Board under Section 11 of the SEBI Act and without prejudice to the generality of such duty the Board having the express power to regulate the working of Investment Advisors (under Sub-Section (2)(b) of Section 11), which, as noted above, encompasses measures to provide for the manner of charging of fees as well as cap of fees, the impugned regulation (Regulation 15A) is clearly within the delegation made in favour of the Board under Section 30(1) of the SEBI Act. If charging of fees in accordance with the specification of the Board is accordingly made a condition of continued registration under Section 12 of the SEBI Act, such condition would be covered by Section 30(2)(d) of the SEBI Act. On the subject of violation of Article 19(1)(g) of the Constitution of India, it is important to note that the impugned Regulation as well as the Circular issued by SEBI in pursuance thereof does not in any way prohibit any party from carrying on the business or profession of Investment Advisor. The Regulation and Circular merely put restrictions, and reasonable restrictions at that, on the general right of businessmen and professionals to carry on the business or profession of Investment Advisor. Prescribing a mode for charging of fees as also the ceiling of fees to be charged by Investment Advisors amounts to a reasonable restriction, at least in principle, in the matter of carrying on the business or profession of Investment Advisors, apart from being an important measure for protection of investors and development and regulation of securities market. In so far as reasonableness of the particular quantum of ceiling of fees determined by SEBI or conditions laid down for charging of such fees are concerned, there is no material placed on record by the Petitioner to suggest that the fees fixed or conditions stipulated are so unreasonable or capricious as not to admit of Investment Advisors’ freedom to practice their profession or business. Petitioner herein cannot seek much assistance from this decision. In the first place, unlike in that case, which did not have any regulatory statutory framework for fixing of a ceiling of permissible tax audits or fees for such audits, in our case the SEBI Act makes particular provisions empowering the Board to regulate the working of Investment Advisors. The profession or business of Investment Advisor is not a traditional profession having its own customs and conventions. Nothing at least has been pointed out to us by learned counsel for the Petitioner in that behalf. If anything, Investment Advice is a profession/business which has come about as an adjunct of the securities market; the Investment Advisor works because investors need professional advice for participating in the affairs of the securities market. It is the statutory duty of SEBI to protect such investors, and develop and regulate that market inter alia by regulating the working of Investment Advisors. If, for performing such duty, SEBI fixes the manner of charging of fees by Investment Advisors or the maximum permissible fees, such fixation per se cannot be faulted as being violative of Article 14 or 19(1)(g). It is another matter, if, whilst fixing these matters, SEBI acts in an unreasonable or capricious manner; in such case, its legislative (or executive) exercise may be vitiated by arbitrariness eschewed by Article 14 or unreasonable restriction not being covered under Article 19(6) and thus infringing Article 19(1)(g). That, we are afraid, has not been the case here. No merit in the challenge to the impugned Regulation as well as the impugned Circular prescribing modes as well as ceiling of fees to be charged by Investment Advisors. Issues Involved:1. Constitutional validity and vires of Regulation 3(XII) of the SEBI (Investment Advisors) (Amendment) Regulations, 2020.2. Authority of SEBI to make regulations concerning fees to be charged by Investment Advisors.3. Alleged breach of the fundamental right to practice a profession or business of choice due to the restrictions imposed by the Amendment Regulations and Circular.4. Interpretation of SEBI Act provisions concerning SEBI's regulatory powers.5. Analysis of relevant case laws cited by the Petitioner.Detailed Analysis:1. Constitutional Validity and Vires of Regulation 3(XII) of SEBI (Investment Advisors) (Amendment) Regulations, 2020:The Petition challenges the constitutional validity of Regulation 3(XII) which introduces Regulation 15A into the SEBI (Investment Advisors) Regulations, 2013. The Petitioner argues that SEBI lacks legislative power to enact such a regulation or issue the Circular dated 23.09.2020, which prescribes modes of charging fees by Investment Advisors. The Petitioner contends that these measures breach the fundamental right of Investment Advisors to carry on their profession by imposing unreasonable restrictions.2. Authority of SEBI to Make Regulations Concerning Fees:The SEBI Act, 1992, under Section 11, grants SEBI the duty to protect investors' interests and regulate the securities market. Section 11(2) specifically includes the power to regulate the working of Investment Advisors and levy fees. The Court notes that SEBI's powers under Section 11 are broad and open-ended, allowing for various measures to protect investors and regulate the market. The Court references Supreme Court judgments, which affirm that SEBI's regulatory measures can include provisions for fees charged by Investment Advisors.3. Alleged Breach of Fundamental Right to Practice Profession:The Petitioner claims that the Amendment Regulations and Circular infringe on their fundamental right under Article 19(1)(g) of the Constitution to practice their profession. The Court finds that the impugned Regulation and Circular do not prohibit the profession but impose reasonable restrictions necessary for investor protection and market regulation. The Court emphasizes that prescribing fee structures and ceilings are reasonable measures within SEBI's regulatory mandate.4. Interpretation of SEBI Act Provisions:The Court examines Sections 11, 12, 19, and 30 of the SEBI Act. Section 30(1) empowers SEBI to make regulations consistent with the Act to carry out its purposes. Section 30(2) provides illustrative measures, including conditions for registration certificates under Section 12. The Court concludes that SEBI's power to regulate Investment Advisors encompasses the authority to specify fee structures and ceilings.5. Analysis of Relevant Case Laws:The Court distinguishes the present case from several cited judgments:- Petroleum and Natural Gas Regulatory Board Vs. Indraprastha Gas Limited: The Court finds this case inapplicable as it dealt with the regulation of retail prices, whereas SEBI's regulation concerns professional fees within its delegated authority.- Narinder S. Chadha Vs. Municipal Corporation of Greater Mumbai: This case involved municipal licensing conditions conflicting with a central statute, which is not analogous to SEBI's regulatory framework.- Cellular Operators Association of India Vs. TRAI: The Court notes that the impugned regulation in that case did not align with the empowering statute's purpose, unlike SEBI's regulation, which aligns with its statutory duties.- Ahmedabad Urban Development Authority Vs. Sharadkumar Jayantikumar Pasawalla: The Court clarifies that SEBI's fee regulation is not a fiscal measure but a regulatory one, within its delegated powers.- Institute of Chartered Accountants of India Vs. K. Bhagvatheeswaran: The Court distinguishes the traditional professions of lawyers and chartered accountants from the regulated business of Investment Advisors, affirming SEBI's authority to impose fee regulations.Conclusion:The Court dismisses the Petition, upholding the constitutional validity and vires of Regulation 3(XII) of the SEBI (Investment Advisors) (Amendment) Regulations, 2020, and the Circular dated 23.09.2020. The Court concludes that SEBI has the requisite authority to regulate the fees charged by Investment Advisors, and such regulation does not violate the fundamental right to practice a profession. The Petitioner's challenge lacks merit, and the imposed fee structures and ceilings are deemed reasonable and necessary for investor protection and market regulation.