2025 (3) TMI 1256 - AT - SEBI

Research analyst penalties upheld for regulatory violations including improper report signing and misleading return promises

The Securities Appellate Tribunal at Mumbai upheld penalties against a research analyst for multiple regulatory violations. The appellant failed to ... Penalty u/s 15A(c) - Failure to sign and date the research reports and to maintain records of research recommendations and rationale for arriving at research recommendations - HELD THAT:- To define as a proper “research report” or a “research recommendation” the document ought to have been duly signed and dated. The allegation by the appellant that at the time of inspection, the inspecting team refused to see the rationale is unsubstantiated and vague. On the other hand, the evidence on record being the core finding on inspection clearly shows that the appellant’s claim is untenable and the appellant’s reliance only on pre-inspection questionnaire is wholly unsustainable. We therefore, don’t find merit in the submission of the appellant. Not maintaining records of ‘Public Appearances’ - No merit in appellant’s contention that publishing the research report on Whatsapp/Telegraph channels does not amount to “Public appearance”. In our considered view, the definition of the term “Public appearance” under Regulation 2(1)(q) of the RA Regulation includes making recommendations/rendering advice relating to securities, on Whatsapp/Telegram channels, in respect of which the appellant is required to make applicable disclosures. We note that the appellant does not maintain any records, whatsoever, in respect of the publication on Whatsapp/Telegram groups, of the research reports/ recommendations. Thus, we uphold the order of the AO of imposing of penalty under Section 15A(c). Penalty u/s 15EB - Material change in ‘internal policy’ which was not communicated to SEBI - Appellant is clearly required to have appropriate mechanisms to ensure independence of his research activities. Undisputedly, he is carrying on other business activities in his individual capacity. The same was required to be reported to the respondent at the time of registration and if there was any change, the same affects the independence of his ‘research analyst’ function qua his other businesses, which may create conflict situations, as seen in the case of the appellant. Therefore, failure to report change in Internal policy has rightly been held as violation of the relevant regulation by the respondent. In view of the same, the appellant’s submission is untenable and it is rejected. Failure to ensure independence of its research activities from its other activities - It is undisputed that the appellant is an individual and a registered Research Analyst. He also carries on independent business activities in his proprietary capacity, inter alia, a Chartered Accountancy Division, a Spiritual/Vipassana Teaching Division and Manish Goel News Broadcast Division (MGNBD), in which he claims to be only an employee. Though no fee is received by him for making research recommendations in the self-manned RA division, admittedly, he earns fee in the other 3 divisions, including the MGNBD, in which he earns fee by broadcasting the research recommendations (which are made available free by RA division). Thus, services in all these verticals are singularly provided by the appellant only. By no stretch of imagination, an arm’s length relationship can be construed within the same ‘individual’. Hence, we uphold the finding of the respondent that the appellant failed to make arm’s length between his RA functions and other functions. Secondly, the argument that the SEBI has given the investment advisory certificate and RA certificate both to the appellant is also incorrect on facts, since the investment advisory certificate was issued to an entity titled MSRAPL (a Company) whilst the RA Certificate was granted to the appellant in his proprietary capacity as an ‘individual’. Moreover, it was the duty of the appellant to have made due disclosure in this regard while making the applications for registration as RA and for investment advisory functions of MGRAPL. Appellant has carried out his independent business of Chartered Accountancy Division through which he used to solicit the business and admittedly no mechanism was put in place to dealing with a conflict situation between the RA division and that division. In view of this, the appellant’s claim is devoid of merit and is rejected. Trading in stocks recommended by the appellant during the restricted period - An independent research analyst to do only business activity of ‘research analysis or preparation and/ or publication of research report’, whereas, it is evident that the appellant has been carrying on several business activities in his individual capacity, which shall have a bearing on his independent functioning as an independent research analyst. Undisputedly, the appellant is a Research Analyst, registered with the SEBI. Since the appellant is not employed as a Research Analyst by any research entity, by implication his case falls under the other alternative category of ‘independent research analyst’ under Regulation 16(2). Therefore, appellant’s contention that prescribed period applies to independent research analyst is baseless and rejected. Failure to make necessary disclosure in the research report/ recommendations - As we find that no explanation was given by the appellant as to how the research report of ‘Investment Trust of India’ prepared by the appellant reached the client and why the same was not duly disclosed by him. The fact remains that the report has reached the client. Under the circumstances, we find his explanation with respect to violation of disclosure requirement under Regulation 19 as unsatisfactory. Regarding the second allegation, we find that in terms of the RA Regulations 21(1), the appellant was required to make disclosure in respect of his registration status and details of financial interest in the Company. The screenshots of Telegram Channels provided by the respondent show that no such disclosure was made by the appellant regarding his RA number or financial interest in securities in respect of which recommendations were made. The appellant questioned the authenticity of such screenshots. This contention is wholly untenable because screenshots are from appellant’s phone. Failure to maintain any record of rationales - There is no evidence on record to prove that the appellant was asked through the PIQ to furnish the rationale of the research recommendations. The respondent has not denied that the rationale were provided through the SCN. There is no conclusive evidence to hold that the appellant was asked but did not provide the rationale during the inspection and that the appellant has been providing recommendations without any underlying research, as undisputedly, considering the client base of the appellant, there have not been statistically significant number of complaints against the appellant, which is not possible if his recommendations were random guesses without supported by research. Therefore, in our view, SEBI’s findings on this aspect are unsustainable. Non-compliance with the KYC procedure - Relying upon the decision in the case of K. Premchand [1953 (10) TMI 5 - SUPREME COURT] we have already held that it is not possible to construe the possibility of having arm’s length relationship within the appellant’s own various income earning activities in individual proprietary capacity qua his Research Analyst activities. Hence, in our considered view, the fiction of arm’s length does not exist between appellant’s fee-yielding business activities qua the Research Analyst division, which too was a proprietary in his individual capacity only. Non-disclosure of the term ‘Research Analyst’ in recommendations / respect of 9 stocks on Whatsapp/ Telegram chats - Evidently, the respondent has downloaded the Whatsapp chats in respect of appellant from his specific authorised telephone number. The respondent at every stage and even at the appellate stage asked the appellant to furnish details of the telephone number and the appellant has not denied the contents of the Whatsapp chat, which admittedly contains specific recommendations made by him with respect to the recommendations for 9 stocks. Further, the appellant failed to submit any proper documentary evidence to show that he had complied with the aforesaid regulatory requirements. In view of this we find no merit in the plea of the appellant, in respect of this violation. Keeping in view the fact that the defaults made by the appellant of the RA Regulations are multiple and repetitive and lack any credible explanation, we hold that the quantum of penalty levied by the AO is justified in view of the provisions of Section 15J of the SEBI Act. Penalty u/s 15HA - We find that the appellant has not denied violation in respect of one scrip i.e. Swasti Vinayak Synthetics Ltd. in respect of which the recommendation through Whatsapp message of assured high returns was made with the offer of one free service. The same undisputedly, falls within the scope of Regulation 4(2)(k) of the PFUTP Regulations, amounting to furnishing of misleading information. Keeping in view the above, we uphold the action of the AO imposing a penalty of Rs. 15 lakhs under Section 15HA. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the appellant failed to maintain proper records and disclosures as required under SEBI regulations.Whether the appellant violated the provisions regarding independence of research activities from other business activities.Whether the appellant engaged in prohibited trading activities during restricted periods.Whether the appellant failed to disclose material information in research reports and public appearances.Whether the appellant complied with Know Your Client (KYC) requirements.Whether the appellant misled clients by assuring high returns through recommendations.2. ISSUE-WISE DETAILED ANALYSISPenalty under Section 15A(c) (Rs. 5 Lakhs)Relevant legal framework and precedents: The appellant was alleged to have violated the SEBI (Research Analyst) Regulations, 2014 by failing to maintain records of research reports and public appearances.Court's interpretation and reasoning: The Tribunal found that the appellant did not maintain proper records as required, including failing to sign and date research reports and not maintaining records of public appearances.Key evidence and findings: The evidence showed that several research recommendations were unsigned and undated, and the appellant did not maintain records of recommendations made on platforms like Whatsapp/Telegram.Application of law to facts: The Tribunal upheld the penalty, finding the appellant's explanations unsubstantiated.Penalty under Section 15EB (Rs. 40 Lakhs)Violation-3: The appellant was alleged to have made material changes to internal policies without informing SEBI.Court's interpretation and reasoning: The Tribunal held that the appellant was required to disclose any changes to internal policies to SEBI, which was not done.Violation-4: The appellant failed to ensure independence of research activities from other business activities.Application of law to facts: The Tribunal found that the appellant's multiple business activities compromised the independence of his research activities.Penalty under Section 15HA (Rs. 15 Lakhs)Relevant legal framework and precedents: The appellant was accused of violating the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations by assuring high returns.Court's interpretation and reasoning: The Tribunal found that the appellant's assurances of high returns and offers of free recommendations were misleading and violated regulatory standards.Key evidence and findings: Messages on Whatsapp/Telegram showed the appellant making assurances of high returns without disclaimers.Application of law to facts: The Tribunal upheld the penalty, finding the appellant's actions misleading and non-compliant with regulatory standards.3. SIGNIFICANT HOLDINGSThe Tribunal upheld the penalties imposed by SEBI, emphasizing the importance of maintaining proper records, ensuring independence of research activities, and adhering to disclosure requirements. The Tribunal dismissed the appellant's appeals, affirming the penalties and the suspension of the research analyst certificate.