Unregistered research analyst told to refund investors via newspaper notice; SEBI deposit condition set aside, practice allowed

The AT considered an appeal by an unregistered research analyst found non-compliant with SEBI's refund directions. The AT held that the appellant shall issue a paper publication in two leading newspapers within 30 days, inviting claims from affected investors, and refund amounts to those who respond within three months of receiving any demand. The appellant must thereafter file a compliance report with SEBI. As the original SEBI order contained no direction for deposit, the subsequent deposit direction was set aside. Given the transactions dated 2014-2019, the appellant is permitted to continue his profession and enroll new clients.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the delay of 318 days in filing the appeal deserved condonation.

1.2 Whether the direction in the impugned order requiring deposit of the unrefunded amount with the securities regulator was sustainable in light of the original order dated 22.04.2022.

1.3 What modality should govern the appellant's further compliance with the refund directions towards clients who had not been contacted or who had not responded.

1.4 Whether the continuing restraint prohibiting the appellant from taking new clients as a research analyst ought to subsist in the facts of partial compliance and the outstanding refund amount.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Condonation of delay in filing the appeal

Interpretation and reasoning: The Tribunal noted the reasons stated in the application for condonation of delay and, on that basis, allowed the application.

Conclusions: Delay of 318 days in filing the appeal was condoned; the miscellaneous application was disposed of.

2.2 Validity of the direction to deposit unrefunded client amounts with the regulator

Legal framework (as discussed): The Tribunal examined the scope of the earlier order dated 22.04.2022, which directed the appellant to offer clients an option to take refund and to refund the fees collected. No direction to deposit any amount with the regulator was contained in that order.

Interpretation and reasoning: The Tribunal recorded that the appellant had collected Rs. 37,26,800/- and, pursuant to the original order, had refunded Rs. 1,75,500/- and accounted for amounts relating to clients who either declined refund or did not respond, aggregating to Rs. 28,21,091/-. A balance of about Rs. 9.05 lakh related to clients whom the appellant had not contacted. The impugned order treated the appellant as non-compliant and directed that the relevant direction in the original order remain in force until refund, effectively prohibiting the appellant from taking new clients and requiring deposit of the remaining sums with the regulator. The Tribunal held that, although the appellant had not yet contacted all clients, the original order did not mandate deposit of any part of the collected fees with the regulator, and hence a fresh direction to deposit such amount exceeded the terms of the original directions.

Conclusions: The direction in the impugned order requiring or contemplating deposit of the remaining unrefunded amount with the regulator was held unsustainable and was set aside.

2.3 Modality for further compliance with refund directions

Interpretation and reasoning: The Tribunal took note that a portion of the amount (about Rs. 9.05 lakh) pertained to clients not yet contacted by the appellant. During hearing, the Tribunal had asked the regulator to obtain instructions on the feasibility of public notice to reach such clients. On instructions, the regulator agreed that the appellant could publish a notice in newspapers, refund amounts to clients who respond, and deposit any residual amount with the regulator. The Tribunal accepted the appellant's offer to issue public notices and fixed a structured compliance mechanism and time-lines, while reiterating that the original order did not direct deposit with the regulator.

Conclusions: The appellant is required to: (i) issue paper publication in two leading newspapers (Dainik Bhaskar and Times of India) within 30 days; (ii) refund the amount to those clients who respond, within an outer limit of three months from receipt of their demand; and (iii) thereafter file a compliance report with the regulator. The requirement in the impugned order to deposit the balance with the regulator was set aside as not arising from the original order.

2.4 Continuation of restraint on taking new clients as research analyst

Interpretation and reasoning: The impugned order continued the effect of the original direction, thereby prohibiting the appellant from taking new clients until full compliance with refund obligations. The Tribunal noted that, out of the total of Rs. 37,26,800/-, only about Rs. 9.05 lakh remained in issue and that the underlying transactions related to the period 2014-2019. Considering the limited outstanding amount, the steps already taken, the proposed mechanism for further compliance, and the age of the transactions, the Tribunal found it appropriate to relax the continuing restraint.

Conclusions: The appellant is permitted to carry on the profession as a research analyst by enrolling new clients, notwithstanding the outstanding balance of about Rs. 9.05 lakh, subject to compliance with the paper-publication and refund process as directed.

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