2023 (12) TMI 1436 - AT - SEBI

Unregistered Investment Advisor Faces Market Ban and Fee Refund for Fraudulent Advisory Services Under SEBI Regulations

M/s. Restock Research Proprietor Mr. Raj Kumar Kushwah Versus Securities and Exchange Board of India, Mumbai

SEBI Tribunal case involving unauthorized investment advisory services. The SC upheld SEBI's penalties against an unregistered investment advisor who ... Unauthorize investment advisory activities through a website without obtaining a registration under the SEBI - violation of Section 12(1) of the SEBI Act read with Regulation 3(1) of the IA Regulations - HELD THAT:- The argument of the appellant appears to be attractive but the same cannot be accepted for the simple reason that the appellant had applied for registration as a Research Analyst on August 26, 2021 whereas the evidence on record indicates that the appellant was carrying on investment advisory services under the name and style of Restock Research from December 2020 onwards and had also collected a sum from his clients while providing different packages of investment strategies. We also find that the website through which the appellant was carrying out investment advisory services also indicated that the appellant was registered with SEBI which was totally false and gave a wrong picture to the investors. Thus appellant was carrying out investment advisory services without getting itself registered under Regulation 3 of the IA Regulations. In addition, the appellant was misleading its investors that it was registered with SEBI as an investment advisor and, therefore, played a fraud in violation of Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. 1. ISSUES PRESENTED and CONSIDERED- Whether the appellant was carrying on investment advisory services without obtaining mandatory registration under the SEBI (Investment Advisers) Regulations, 2013 ('IA Regulations').- Whether the appellant's conduct of providing investment advisory services prior to registration, including collection of fees from clients, violated Section 12(1) of the SEBI Act and Regulation 3(1) of the IA Regulations.- Whether the appellant's representation on its website falsely indicating SEBI registration constituted a fraudulent and unfair trade practice under Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.- Whether the penalties imposed by the Chief General Manager (CGM) of SEBI, including refund of fees collected, restraining access to securities market for two years, and monetary penalty under Sections 15HA and 15HB of the SEBI Act, were justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Unauthorized carrying on of investment advisory services without registration under IA RegulationsRelevant legal framework and precedents: Section 12(1) of the SEBI Act mandates that no person shall act as an investment adviser unless registered under the IA Regulations. Regulation 3(1) of the IA Regulations requires registration prior to carrying on investment advisory activities.Court's interpretation and reasoning: The Tribunal noted that the appellant applied for registration as a Research Analyst on August 26, 2021. However, evidence demonstrated that the appellant was providing investment advisory services from December 2020, well before the registration application. This activity without registration contravened the statutory mandate.Key evidence and findings: The appellant's own website and client records showed that advisory services were rendered and fees amounting to Rs. 10,72,747/- were collected from clients prior to registration. The appellant offered various investment strategy packages during this period.Application of law to facts: The appellant's pre-registration advisory activities constituted unauthorized practice under Section 12(1) of the SEBI Act and Regulation 3(1) of the IA Regulations. The Tribunal rejected the appellant's contention that it was unaware of the prohibition on carrying out advisory services pending registration.Treatment of competing arguments: The appellant argued that the application for registration was pending and that it was unaware that advisory activities could not be conducted before registration. The Tribunal found this argument untenable given the clear statutory requirement and the timeline of activities.Conclusions: The appellant was held to have violated the mandatory registration requirement by carrying on investment advisory services without registration.Issue 2: Misrepresentation and fraudulent conduct by falsely indicating SEBI registration on websiteRelevant legal framework and precedents: Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 prohibit fraudulent and unfair trade practices including misrepresentation and misleading investors.Court's interpretation and reasoning: The Tribunal observed that the appellant's website falsely stated that it was registered with SEBI as an investment advisor. This misrepresentation was found to be deliberate and misleading, creating a false sense of security among investors.Key evidence and findings: The website content was examined and found to contain incorrect statements regarding SEBI registration status. The timing of such statements coincided with the period when the appellant was unregistered and conducting advisory activities.Application of law to facts: The false claim of registration was held to constitute a fraudulent and unfair trade practice under the SEBI (PFUTP) Regulations, 2003, thereby compounding the violation of the IA Regulations.Treatment of competing arguments: The appellant did not provide any plausible explanation or evidence to rebut the misrepresentation allegation. The Tribunal rejected any suggestion that the misstatement was inadvertent or immaterial.Conclusions: The appellant's conduct amounted to fraud and unfair trade practice, violating SEBI's PFUTP Regulations.Issue 3: Validity and appropriateness of penalties and directions imposed by SEBI CGMRelevant legal framework and precedents: Sections 15HA and 15HB of the SEBI Act empower SEBI to impose monetary penalties for contravention of provisions of the Act and regulations. The power to direct refund of amounts collected unlawfully and restrain access to securities market is also recognized under the SEBI Act.Court's interpretation and reasoning: The Tribunal upheld the CGM's order directing refund of Rs. 10,72,747/- collected without registration, restraining the appellant from accessing the securities market for two years, and imposing a penalty of Rs. 6 lakhs. The Tribunal found no error of law or perversity in these directions.Key evidence and findings: The appellant's unauthorized collection of fees and fraudulent misrepresentation justified the refund and restraint. The penalty amount was proportionate to the violation and aimed at deterrence.Application of law to facts: The penalties and directions were consistent with SEBI's mandate to protect investors and maintain market integrity. The appellant's conduct warranted such measures to prevent recurrence and safeguard public interest.Treatment of competing arguments: The appellant contended that the penalties were harsh given the claimed ignorance of law and pending registration application. The Tribunal rejected this, emphasizing the strict liability nature of registration requirements and the need for investor protection.Conclusions: The penalties and directions imposed by the CGM were justified, proportionate, and legally sustainable.3. SIGNIFICANT HOLDINGS'The appellant was carrying out investment advisory services without getting itself registered under Regulation 3 of the IA Regulations.''The appellant was misleading its investors that it was registered with SEBI as an investment advisor and, therefore, played a fraud in violation of Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to