2022 (6) TMI 1048 - HC - SEBI

Court upholds SEBI's Regulation 15A and Circular, emphasizing limited judicial review on economic policies.

The court dismissed the Writ Petition, upholding the validity of Regulation 15A and the Circular issued by SEBI. The court emphasized that judicial review ... Investment Adviser entitled to charge fee for providing investment advice from a client in the manner as specified by the Board - fixation of a maximum cap of fee which may be charged by Investment Advisor violates any fundamental rights of the petitioners - HELD THAT:- In Ehsan Khalid Vs. Union of India [2013 (10) TMI 851 - SUPREME COURT] the Supreme Court had held that where there is a challenge to a Government policy, particularly economic policy, Court would not interfere in such policy matters in exercise of its power of judicial review unless such policy is found to be grossly arbitrary or unfair or unreasonable or irrational or violative of Constitutional provisions or contrary to statutory provision. We are of the opinion that it is not the function of this Court to sit in judgment over a matter of economic policy such as that contained in the Regulation 15A and the Circular dt.23.09.2020 though, this Court might feel that a different policy would have been fairer or wiser or more scientific or more logical when such policy is not patently arbitrary, discriminatory or mala fide. SEBI is an expert body constituted to deal with the securities market and is empowered to regulate activities of various entities including Investment Advisors while protecting the interest of investors. From a reading of Circular dt.23.9.2020, it is clear that the parties i.e. the client and the Investment Advisors are given a choice to choose between either a fixed fee mode or fee fixed on the basis of AUA. In the later mode, the fee is chargeable on the basis of AUA per annum. We do not find anything arbitrary or illogical in this arrangement which would prevent Investment Advisors from giving proper advice to clients or dis-incentivising them. Issues Involved:1. Violation of Fundamental Rights under Article 14 and 19(1)(g) of the Constitution of India.2. Violation of Section 11(1) and 30(1) of the Securities & Exchange Board of India (SEBI) Act, 1992.3. Impact of Regulation 15A and the Circular on the incentive structure for Investment Advisors.4. SEBI's authority and rationale for regulating fees charged by Investment Advisors.5. Judicial review of economic policy decisions by regulatory bodies.Issue-wise Detailed Analysis:1. Violation of Fundamental Rights under Article 14 and 19(1)(g) of the Constitution of India:The petitioners argued that Regulation 15A and the Circular dated 23.09.2020 violate their fundamental rights under Article 14 (right to equality) and 19(1)(g) (right to practice any profession or to carry on any occupation, trade, or business) by imposing unreasonable restrictions on the fees that Investment Advisors can charge. They claimed these provisions deprive them of the right to practice their profession effectively and equitably, as highly skilled advisors would not be incentivized to excel.2. Violation of Section 11(1) and 30(1) of the SEBI Act, 1992:The petitioners contended that the Regulation and Circular are inconsistent with SEBI's mandate under Section 11(1) and 30(1) of the SEBI Act, which requires SEBI to protect investors' interests and promote the development and regulation of the securities market. They argued that the fee caps could lead to a decline in the quality of advisory services, which would be detrimental to investors.3. Impact of Regulation 15A and the Circular on the incentive structure for Investment Advisors:The petitioners argued that the fee caps would disincentivize highly skilled Investment Advisors from maximizing clients' wealth, as the fee structure does not reward performance. They illustrated that an advisor who significantly increases a client's assets would earn the same fee as one who performs poorly, which they claimed is illogical and unjustifiable.4. SEBI's authority and rationale for regulating fees charged by Investment Advisors:SEBI defended its actions by stating that the fee regulation was introduced to address numerous complaints from investors about malpractices by Investment Advisors, such as assuring returns, charging exorbitant fees, mis-selling, and non-disclosure of charges. SEBI argued that the fee caps are necessary to protect investors and ensure fair practices in the securities market. SEBI also highlighted that the power to regulate fees existed in the SEBI (Investment Advisors) Regulations, 2013, even before the insertion of Regulation 15A.5. Judicial review of economic policy decisions by regulatory bodies:The court cited precedents where the Supreme Court held that judicial review of economic policy decisions is limited. Courts should not interfere in policy matters unless the policy is grossly arbitrary, unfair, unreasonable, irrational, or violative of constitutional provisions. The court emphasized that SEBI, as an expert body, is better positioned to make decisions regarding the regulation of the securities market. The court found that the Regulation and Circular were neither arbitrary nor illogical and did not violate any fundamental rights.Conclusion:The court dismissed the Writ Petition, holding that it is not the function of the court to interfere with economic policy decisions made by expert regulatory bodies like SEBI unless such policies are patently arbitrary, discriminatory, or mala fide. The court found the Regulation 15A and the Circular to be reasonable measures aimed at protecting investors' interests and ensuring fair practices in the securities market.