TaxTMI 
TaxTMI 
2025 (7) TMI 1466
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....uda Finance, i.e., two partnership firms where the former was allegedly formed by the ex-employers of the Noticee and the latter was formed by the Noticee and one Mr. Prateek Gupta. 3. These findings of the inspection were communicated to the Noticee on April 25, 2022 and upon examining his reply dated May 23, 2022, SEBI observed apparent violation of certain provisions of the SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as "IA Regulations"). 4. Accordingly, Enquiry proceedings under Chapter V of the Intermediaries Regulations were initiated against the Noticee by appointing a Designated Authority (hereinafter referred to as "DA") in the matter on December 27, 2022. Proceedings before Designated Authority 5. In light of the aforesaid findings of the inspection, the DA issued a show cause notice (hereinafter referred to as "pre-Enquiry SCN") dated February 20, 2023 to the Noticee, inter alia, alleging violation of regulation 13(b) read with regulation 13(a) of IA Regulations and clauses 1, 5 and 8 of the Third Schedule to the IA Regulations read with regulation 15(9) of the IA Regulations. The Noticee filed his reply dated March 6, 2023 to the sa....
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.... under the provisions of SEBI (Settlement Proceedings) Regulations, 2018 ("Settlement Regulations") for settling the instant Enquiry proceedings. It is also pertinent to note that separate enforcement proceedings ("11B proceedings") were approved by the competent authority against the Noticee on November 30, 2022 and against three other entities (including one Mr. Prateek Gupta who was a partner of Garuda Finance) on March 3, 2023 under sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) of the Securities and Exchange Board of India Act, 1992 ("SEBI Act") for carrying out unregistered investment advisory activities through F3 Financials and Garuda Finance. In respect of the same, the Noticee suo motu filed another settlement application dated November 24, 2023 for settling the 11B proceedings. 11. The 11B proceedings were allocated to me on December 14, 2023 and an SCN dated May 16, 2024 came to be issued in the 11B proceedings against the Noticee and the three other entities. Subsequently, Mr. Prateek Gupta also filed settlement application in order to settle the 11B proceedings initiated against him. It is noted that both the settlement applications filed by the Noticee (Enquiry ....
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.... on April 2, 2024, another opportunity of personal hearing was granted to the Noticee on June 4, 2024 which was attended by him along with his authorised representative, viz., Shri Abhishek Mishra, wherein it was submitted by the Noticee that the report of the DA which did not recommend any adverse action against the Noticee may be accepted. 15. Thereafter, post receipt of intimation that Mr. Prateek Gupta had also withdrawn his settlement application in respect of the 11B proceedings on November 5, 2024, it was decided that another opportunity of personal hearing on January 14, 2025 be granted to all the concerned entities, viz., the Noticee in the instant Enquiry proceedings and the 11B proceedings, and the other three entities (viz., Mr. Prateek Gupta, F3 Financials and Garuda Finance) against whom 11B proceedings were initiated so as to take a comprehensive view of the matter as the facts leading to the alleged violations were similar. 16. However, Mr. Prateek Gupta sought an adjournment of the hearing scheduled for January 14, 2025 on account of his mother's deteriorating health condition and the Noticee, Mr. Sumit Kumar Waghmare also requested for an adjournment and req....
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....an IA and that he intimated SEBI regarding the address change prior to the observation by the Auditor in his Compliance Audit Report. There was no clarity regarding the term 'material change' as it was nowhere defined or illustrated in the regulations and SEBI interpreted the clause in a way that favoured it. The Noticee also submitted that none of the investors/clients were aggrieved by this act as communication was not broken with them in any manner since the Noticee was always available on calls and emails and promptly responded to any queries of the investors/clients. (b) Submissions regarding Allegation 2: Unregistered investment advisory activities through F3 Financials - The Noticee submitted that the firm F3 Financials was formed by one Mr. Dipak Kumar Baid and one Mr. Hemanth Kumar and he himself was a victim of fraudulent activity since his name and documents were fraudulently used in F3 Financials by those two persons, who were his ex-employers in a firm, Global Money Control. He was neither providing any unregistered investment advisory services nor having any control over the activities of F3 Financials and the activities of F3 Financials were being c....
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....Noticee, a registered Investment Adviser, as it was clearly disclosed on mail, client agreement, website, etc., of Garuda Finance that it was a SEBI registered Investment Adviser and Noticee's registration number was also mentioned. The Noticee even claimed that he was disclosing his registration details along with the brand name even before the implementation of SEBI's Circular dated April 6, 2023 in this regard and that no client had ever made a complaint against him regarding misrepresentation. Further, the Noticee contended that the mere collection of fees from clients in the bank account of Garuda Finance did not lead to any harm to the investors or affected the integrity of the market. The Noticee also submitted that Mr. Prateek Gupta was just an investor in the business and the Memorandum of Understanding (MoU) dated June 15, 2019 executed between the Noticee and Mr. Prateek Gupta clearly stated that all financial activities and business operations would only be managed by Mr. Sumit Kumar Waghmare and Mr. Prateek Gupta would not be involved in the business activities. Further, the Noticee submitted that a partnership deed was entered into between the Noticee and Mr.....
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....e Noticee further contended that unregistered investment advisory refers to providing investment advice by a person without obtaining a valid SEBI registration, however, in the case of Garuda Finance, the Noticee was holding a valid registration certificate issued by SEBI. SEBI in its order dated November 22, 2022 in the matter of Chetan Kalubhai Dhokiya (where an individual IA had collected fees from clients in the bank account of a separate corporate entity) had considered that the Individual was a SEBI-registered IA and had not construed the investment advisory activity as unregistered and had not directed a refund of fees collected. 20. The Noticee also submitted that the recommendation of the DA for not taking any action against the Noticee was justified in view of the facts and circumstances of the case and pleaded that no action be taken against him. Consideration of issues and findings 21. I have perused the SCN issued by the DA, the Enquiry Report, the post- Enquiry SCN, the Supplementary SCN, the submissions of the Noticee in replies filed by him and during the personal hearings, and other material available on record, and it is appropriate at this stage to enume....
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.... measures recommended by the designated authority, the competent authority shall cause to forward a copy of the report submitted by the designated authority and call upon the noticee to make its submission, in writing, as to why the measures recommended by the designated authority or any other action as contemplated in these regulations, should not be taken. SEBI (Investment Advisors) Regulations, 2013 Definitions. 2. (1) In these regulations, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below, and their cognate expressions shall be construed accordingly,- ... (l) "investment advice" means advice relating to investing in, purchasing, selling or otherwise dealing in securities and advice on investment portfolio containing securities whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning: ... (m) "investment adviser" means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes a part-time ....
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....Further, the Noticee himself, vide email dated January 19, 2022 to SEBI, admitted that he had changed his address during FY 2019-20, however, could not intimate SEBI as he was unaware of the said compliance requirement. Accordingly, it was alleged in the post-Enquiry SCN that the Noticee violated the provisions of regulation 13(b) read with regulation 13(a) of IA Regulations, and clause 1 and 8 of the 'Code of Conduct for Investment Adviser' as laid down in the Third Schedule to the IA Regulations read with regulation 15(9) of IA Regulations. 24. However, the Noticee vide his replies to SEBI contested this allegation on the preliminary ground that there was no clarity regarding the term 'material change' mentioned in the IA Regulations as the same was not defined thereunder and thus, the same should be interpreted in light of the prevailing circumstances. He further contended that no timeline was specified by SEBI for updating a material change in the information submitted earlier and that he intimated the change in address to SEBI on February 25, 2021, well before the before the Compliance Audit Report. He also claimed that he could not submit the documentary proof for change o....
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....tary proof in support of the same, he has not, technically, updated his address till date and his contention that there is no option of submitting a documentary proof on the SI Portal is without merit. Further, I note that no evidence was produced by the Noticee to show that even the clients of the Noticee were informed of the change in address. 28. Without prejudice to the above finding about non-updation of change of address by the Noticee till date, I note that even the intimation by the Noticee to SEBI regarding change of address on February 25, 2021 was unduly delayed and does not meet the rigors of the language of regulation 13(b) of IA Regulations which, inter alia, reads "the investment adviser shall forthwith inform the Board in writing... if there is any material change in the information already submitted". Even though the provision does not admit of a clear timeline within which the material change has to be informed, I note that the word "forthwith" is generally considered to be synonymous with the word "immediately" and I refer to a recent judgment of the Hon'ble Supreme Court dated May 13, 2024 in the matter of Shento Varghese vs. Julfikar Husen & Ors. (Criminal A....
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....th regulation 15(9) of IA Regulations. 31. At this juncture, I note that the DA in his Enquiry Report was of the view that this was not a fit case for recommending cancellation of registration of the Noticee as in the view of DA, violation regarding non-updation of change of address was technical in nature. I also note that no complaint has been received from any client on this account and no serious harm has been caused to anyone, and therefore, I agree with the DA that the violation is technical in nature and I am inclined to grant benefit to the Noticee. Allegation 2: Unregistered investment advisory activities through F3 Financials 32. SEBI received a complaint against F3 Financials on June 25, 2019 alleging that F3 Financials was carrying on investment advisory activity through the website www.f3financials.com without obtaining SEBI registration and though the complainant had transferred an amount of Rs. 30,000/- in the ICICI bank account of F3 Financials to receive advisory service, no service was provided. 33. During the course of inspection of the Noticee, it was observed that the Noticee was the proprietor of F3 Financials which was involved in providing invest....
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....provided 'investment advice' as defined under regulation 2(1)(l) of the IA Regulations and engaged in the activities of an 'investment adviser' as defined under regulation 2(1)(m) of the IA Regulations through F3 Financials, an unregistered investment advisor and by failing to update SEBI about the said unregistered investment advisory activity during pendency of his registration application and post grant of registration, the Noticee allegedly violated the provisions of regulation 13(b) of IA Regulations read with regulation 13(a) of IA Regulations, and clause 1, 5 and 8 of the 'Code of Conduct for Investment Adviser' as laid down in the Third Schedule to the IA Regulations read with regulation 15(9) of IA Regulations. 37. In this regard, the Noticee has claimed that he was a victim of fraud as his former employers had misused his registration as narrated in earlier paragraphs. However, it is noted that the income earned by F3 Financials was mentioned in Noticee's Income Tax Return (ITR) for FY 2019-20. 38. The Noticee has also tried to demonstrate the fraud committed on him by furnishing copies of the police complaint dated March 18, 2021 filed by him in the police station ....
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....id and that he had filed a police complaint in this regard. Almost an year later, vide email dated March 5, 2022, the Noticee submitted the copy of police complaint and private complaint. 41. From the chronology of events as stated above, it is clear that the Noticee filed the police complaint in March 2021, more than a year after hand delivery of SEBI's letter seeking details of activities carried out by F3 Financials in January 2020 and close on the heels of the reminder letter sent by SEBI on March 1, 2021. Thus, it appears that filing of the police complaint and the subsequent private complaint by the Noticee to raise the bogey of fraud committed on him were an afterthought in order to evade submission of details sought by SEBI as well as any possible enforcement action for carrying out unregistered investment advisory activities. 42. Further, as per the details available on the 'Ecourts Services' website, the private complaint before the Addl. Chief Metropolitan Magistrate (Case No. PCR/0019278/2021) was referred to the police for investigation in June 2022. The police investigated the matter and filed a closure report in June 2024. The Noticee's counsel sought time till....
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....particulars on the account opening cheque not matching with the handwriting of signature, and the website of F3 Financials as well as the complaints received against F3 Financials not mentioning his name, or the address of SEBI's letter being allegedly used by Mr. Dipak Kumar Baid for operating other unregistered firms, to be flimsy and of no avail to the Noticee. 45. I further note that the charge levelled against the Noticee in the instant Enquiry proceedings is of having failed to inform SEBI of carrying on unregistered investment advisory activities through F3 Financials and in view of the aforesaid findings, I have no hesitation in concurring with the DA's observations that the Noticee failed to disclose to SEBI that he was involved in carrying out unregistered investment advisory activities through F3 Financials and thus, violated the provisions of regulation 13(b) read with regulation 13(a) of IA Regulations, and clause 1, 5 and 8 of the 'Code of Conduct for Investment Adviser' as laid down in the Third Schedule to the IA Regulations read with regulation 15(9) of IA Regulations. 46. It is curious to note that the noticee was giving investment advice through F3 Financia....
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....city. As per the partnership deed executed on July 1, 2019, the Noticee and one Mr. Prateek Gupta were partners of Garuda Finance with 50:50 profit sharing. The KYC for bank accounts of Garuda Finance was signed by both the Noticee and Mr. Prateek Gupta and they were the authorised signatories as well as the beneficiaries of the bank accounts. 50. The partnership deed dated July 1, 2019, inter alia, mentioned that "the business of the partnership shall be the stock market advisory, financial advisory, consultancy in the field of Finance & Portfolio management and any other similar activity of advisory services". It was observed from the cached pages of the website of Garuda Finance (https://www.garudafinance.com) that various packages for investment advisory were offered by Garuda Finance. Further, the website mentioned the modes of payment for advisory services, viz., in bank accounts maintained with Yes Bank, HDFC Bank and Axis Bank, and Payment Gateway offered by Paytm and Razorpay. 51. As per information received from the Noticee vide email dated March 28, 2022, it was observed that Garuda Finance collected an amount of Rs. 2,51,16,455/- during the period July 15, 2019 to....
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....sed by him as the same builds trust and is useful for attracting prospective clients. The Noticee even claimed that he was disclosing his registration details along with the brand name even before the implementation of SEBI's Circular dated April 6, 2023 dealing with usage of brand name/trade name by Investment Advisers and Research Analysts. 56. The Noticee also submitted that Mr. Prateek Gupta was just an investor in the business and for the sake of transparency, an MoU was entered into between them which clearly stated that Mr. Prateek Gupta would not be involved in business activities and all financial activities and business operations would be managed by the Noticee. The MoU further stated that Mr. Prateek Gupta would only have access to books of accounts and shall not use the license of the Noticee, thereby highlighting that the Noticee was handling the business individually. 57. The Noticee also claimed that since Mr. Prateek Gupta, being an investor, wanted access to financials and bank accounts, the Noticee decided to open a joint account. However, the Banks insisted that a joint account could be opened only if a partnership was formed between the Noticee and Mr. Pr....
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....ng partnership firms) vis-à-vis individuals for obtaining registration from SEBI as an IA, viz., certification requirement, networth requirement, 'fit and proper' criteria, etc. For ease of reference, a few examples of the said distinction inherent in the IA Regulations are as under: (a) in terms of regulation 6 of IA Regulations, in case an applicant is a firm, the qualification and certification requirement are required to be fulfilled by not just the principal officer of the firm but also by all persons associated with investment advice; (b) in terms of regulation 6 of IA Regulations, the 'fit and proper' person criteria as laid down in the Schedule II of the SEBI Intermediaries Regulations is required to be fulfilled by the partners, principal officer and persons associated with investment advice, in addition to the applicant firm; (c) In terms of regulation 8 of IA Regulations, the networth requirement for non- individuals (Rupees Fifty Lakh) is quite different from the networth requirement for individuals (Rupees Five Lakh). 62. Such statutory distinction in the framework of IA Regulations clearly demonstrates the intent of SEBI to treat i....
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....rtion by the Noticee that since all complaints in respect of services rendered by Garuda Finance were actually registered against him in the SEBI SCORES, and thus, clients were aware of the actual Investment Adviser, cannot be accepted since complaints were filed against the Noticee only for the reason that his registration number was mentioned in correspondences of Garuda Finance with the clients. Even if the assertion of the Noticee is accepted at face value, it would also, at the most, lead to the inference that only those clients came to know of the actual Investment Adviser who filed a SCORES complaint when they entered the registration number of the IA. Accordingly, I am not able to accept the contention of the Noticee that every client was aware of the fact that he was the person behind Garuda Finance. 64. Further, the claim of the Noticee that all the complaints on SCORES portal related to clients' dissatisfaction with the services rather than for providing unregistered investment advisory services provided by Garuda Finance does not in any way aid the Noticee since I have already arrived at the conclusion that unregistered investment advisory services were being provide....
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....t matter are starkly different since the Noticee had no intention whatsoever to get his partnership firm, Garuda Finance registered with SEBI and Dhokiya was not providing investment advise hiding behind a partnership firm. Thus, I find that the reliance placed by the Noticee on the Dhokiya order is misplaced. 67. Further, as regards the incorrect SEBI registration number mentioned by Garuda Finance in one of the client agreements, I note that the Noticee has admitted that the same was an unintentional typographical mistake and that no such issue was found in other client agreements inspected by SEBI. Since the Noticee has not been charged for misrepresentation, I am not dealing with this issue in the instant order. 68. In view of the foregoing discussions, I agree with the conclusion of the DA that the Noticee was involved in providing unregistered investment advisory activities through his partnership firm, Garuda Finance and failed to update SEBI regarding the same and thus, has violated the provisions of regulation 13(b) read with regulation 13(a) of IA Regulations, and clause 1, 5 and 8 of the 'Code of Conduct for Investment Adviser' as laid down in the Third Schedule to....