2025 (8) TMI 1233 - Board - SEBI

Partner held jointly liable for unregistered advisory firm; ordered to refund INR 2,23,404.10; deposit to avoid Section 28A action

In Re. : Swati Purwar in the matter of Prowise Capital

In Re. : Swati Purwar in the matter of Prowise Capital - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the noticee was a partner of the partnership firm and, if so, the tenure of such partnership. 2. Whether the noticee, as a partner during the relevant period, is liable for the firm's unregistered investment advisory activities under section 12(1) of the SEBI Act read with regulation 3(1) of the IA Regulations and regulation 4(2)(k) of the PFUTP Regulations. 3. If liability is established, the extent/quantum of the noticee's refund obligation and whether that obligation is co-extensive with the firm's overall liability or limited to the period of partnership. 4. Whether debarment from the securities market should be imposed on the noticee in light of prior debarment period already undergone and principles of proportionality. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence and tenure of partnership Legal framework: Determination of partnership status and tenure is governed by the partnership deed and applicable principles under the Indian Partnership Act insofar as relevant to facts of association of persons. Precedent treatment: No binding precedent required to establish fact of partnership where documentary evidence exists; reliance placed on partnership deed, resignation letter and contemporaneous affidavits. Interpretation and reasoning: The partnership deed (dated 15 January 2016) containing clauses (partnership at will; process of resignation), the resignation letter dated 15 March 2016 (acknowledged by a partner) and an affidavit by two partners confirming resignation within two months are contemporaneous and consistent materials establishing that the noticee was a partner from 15 January 2016 to 15 March 2016. Ratio vs. Obiter: Ratio - where documentary evidence (deed, resignation, partner affidavits) is available and uncontradicted, a noticee's tenure as partner is determinable and binding for subsequent liability assessment. Obiter - none relevant. Conclusion: The noticee was a partner of the firm only for the period 15 January 2016 to 15 March 2016. Issue 2 - Liability of a partner for firm's unregistered investment advisory activities Legal framework: Section 12(1) of the SEBI Act read with regulation 3(1) of the IA Regulations prohibits acting as an investment adviser without registration; regulation 4(2)(k) of the PFUTP Regulations prohibits knowingly holding out as an investment adviser without registration. SEBI's powers to issue directions and recovery arise under Sections 11, 11(4), 11B(1), and related provisions. Precedent treatment: Criminal-law cases cited by the noticee (concerning criminal liability of partners) are distinguished as addressing mens rea and criminal responsibility; quasi-judicial/civil enforcement proceedings under SEBI invoke principles of civil liability where firm acts bind partners. Earlier SEBI / SAT orders limit refund liability to period of directorship/tenure in analogous corporate contexts. Interpretation and reasoning: Partnership is not a separate legal entity; each partner is an agent of the firm and civilly liable for acts of the firm. The proceedings here are quasi-judicial/enforcement in nature; criminal-law standards relied upon by the noticee do not govern SEBI's civil/enforcement liability assessment. The partnership deed designates partners as working partners, reinforcing potential agency and civil liability. Therefore, a partner is civilly liable for acts of the firm committed during the period of partnership, irrespective of participation in day-to-day management or profit receipt. Ratio vs. Obiter: Ratio - in civil/quasi-judicial enforcement proceedings, partners are jointly and severally liable for acts of the firm within their tenure; criminal-law authorities on mens rea are not apposite to negate civil enforcement liability. Obiter - detailed reference to working-partner clause as supporting evidence of potential agency. Conclusion: The noticee is liable as a partner for the firm's unregistered investment advisory activities to the extent such activities occurred during her period of partnership. Issue 3 - Quantum and temporal extent of refund liability Legal framework: SEBI's refund and recovery directions are to restore monies collected in contravention of registration requirements; prior SEBI/SAT decisions have limited refund liability to amounts collected during a director's or officer's tenure where tenure can be demarcated. Precedent treatment: Guided by SEBI/SAT orders which restrict refund obligations to amounts collected during the period of directorship/tenure (analogous authority and principle applied here). Interpretation and reasoning: The Final Order established that the firm collected fees through identified bank accounts over a multi-year period. Given the established fact that the noticee was a partner only from 15 January 2016 to 15 March 2016, and given precedent and principle that refund liability should be co-terminous with tenure of office/association, the noticee's refund obligation is limited to amounts credited to the firm during her period of partnership. The Final Order's computation records total credits during that period as INR 2,23,404.10, which is the quantifiable amount linked to the noticee's tenure. The noticee admitted potential liability for transactions in the firm's bank account prior to resignation; therefore liability is confined to monies received by the firm during her partnership tenure, payable jointly and severally with other partners/firm. Ratio vs. Obiter: Ratio - refund liability of a partner in enforcement proceedings is limited to monies collected by the firm during the partner's tenure; quantified liability must be based on actual receipts attributable to that tenure. Obiter - reference to specific bank accounts and earlier cases is illustrative of computation approach. Conclusion: The noticee's refund liability is INR 2,23,404.10, being the amount collected by the firm during her partnership period, payable jointly and severally with the firm and other partners; deposit of that amount with the regulator discharges liability pending ongoing recovery proceedings. Issue 4 - Appropriateness of debarment Legal framework: SEBI may impose market access restrictions (debarment) as part of remedial/directional powers, subject to proportionality and reasonableness principles. Precedent treatment: Proportionality and reasonableness guide imposition of debarment; prior debarment period already undergone by an aggrieved person is relevant to avoid cumulative disproportionate punishment. Interpretation and reasoning: The Final Order had imposed a two-year debarment from the securities market commencing from completion of refund. The noticee has already served debarment for over 3.5 years in consequence of the Final Order until the SAT set aside the order qua her. Considering proportionality and reasonableness, additional debarment directions against the noticee are unnecessary and disproportionate in the circumstances. Ratio vs. Obiter: Ratio - where an affected person has effectively undergone significant debarment consequent to an order later set aside and remanded, further debarment may be unwarranted to ensure proportionality. Obiter - none material beyond proportionality observation. Conclusion: No further debarment directions are warranted against the noticee. Final operational conclusions and directions (as to remedy) 1. The noticee is directed to refund, jointly and severally with the firm and its other partners, the amount of INR 2,23,404.10 representing monies received by the firm during the noticee's partnership tenure, or alternatively to deposit the said amount with the regulator (fixed deposit with lien) within the stipulated timeline, subject to verification and utilization in ongoing recovery and refund proceedings. 2. Repayments must be effected through banking channels with audit trail; public notice and reporting obligations and the contingency of further action under section 28A are prescribed for non-compliance.