SEBISEBI (IA) Regulations, 2013: Registration as Investment Adviser mandatory for giving Automated Investment Advise

The Securities Exchange Board of India, in the matter of Finassure Financial Services Pvt. Ltd., Order Number WTM/ASB/WRO/WRO/23472/2022–23 decided on 02.02.2023, adjudged that the company and its directors have violated the provisions of Section 12(1) of the SEBI Act and Regulation 3(1) of the IA Regulations by providing automated investment advisory services without registration.

FACTS

Shri Gopal Kumar (hereinafter referred to as “Complainant”) filed a complaint against Finassure Financial Services Pvt. Ltd. (hereinafter referred to as  “Noticee 1”), wherein it was stated that the Complainant had taken trading advice from the Company.

The Complainant, in the said complaint, had also mentioned that he had sought refund of Rs. 3,000 paid by him, but the Company was not responding to his calls. After the complaint, the veracity was examined in accordance with the provisions of the Securities and Exchange Board of India Act, 1992, the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 and any other Regulations or provisions of securities laws.

Thereafter, a show cause notice was issued against the company, Mr. Amit Sharma (hereinafter referred to as “Noticee 2”) and Mr. Saket Sharma (hereinafter referred to as “Noticee 3”) who, without being registered investment advisors, were providing investment advisory services. Upon issuance of the Show Cause Notice, the Noticees have neither filed any reply to the SCN nor availed the opportunity of a personal hearing.

ISSUES

1. Whether Finassure Financial Services Pvt. Ltd.–

a) was offering services in the nature of investment advice through its website and acting as an investment adviser; and

b) has violated Section 12 (1) of the SEBI Act and Regulation 3(1) of the SEBI (IA) Regulations?

4. If answer to Issue 1, is in the affirmative, then what is the total amount mobilised by Finassure Financial Services Pvt. Ltd. through unregistered investment advisory activities?

5. If answer to Issue 1, is in the affirmative, then whether Mr. Amit Sharma and Mr. Saket Sharma, directors in the Company can be held liable for the actions of the Company?

CONTENTIONS OF THE PARTIES

The complainant contends that Noticee 1 through its website, www.ffsplbuysellsoftware.in was providing investment advisory services. The SCN also records that the webpages of Noticee 1 shows various advisory services/packages being offered by it. In this regard, it is noted from the record that the said website had provided the details of a bank account to which payments can be made. Further, from the information/documents as received from the Bank, the said bank account was in the name of Noticee 1.

In line of the contention, the adjudicating authority observed that in the ‘Who we are’ section of the website as appearing in the screen-grabs of the webpages of www.ffsplbuysellsoftware.in, the introduction states that “FFSPLBUYSELLSOFTWARE.IN a division of Finassure Financial Services (P) Ltd. is among very few in developing most unique advance and accurate automatic buy sell signal software for Technical Analysis with Target and Stop Loss for Intraday trades.” Accordingly, it can be concluded that the website – www.ffsplbuysellsoftware.in belonged to Noticee 1.

Additionally, it is evident from the webpages available on the record that the stated goal, mission and vision was to “help Indian traders and investors achieve above-average returns from the markets by providing them with profitable trading signals and at the same time protect their trading capital.”

It has already been established that Finassure through its website was carrying out Investment Advisory Activities. Further, from the records of SEBI , it can be concluded that neither Noticee 1 nor any of its directors, Noticee 2 and Noticee 3 were at any time registered as investment adviser with SEBI. All credits Noticee 1 has maintained in its  bank account to receive fees/funds in respect of the unregistered investment advisory services. There are no replies received from the Noticees , including the company.

DECISION AND FINDINGS

As per the show cause notice  the Noticee 2 and Noticee 3 had violated Section 12(1) of the SEBI Act and Regulation3(1) of IA Regulations by carrying out unregistered investment advisory activities. The said contentions were accepted by the Adjudicating Authority whereby the Adjudicating Authority held that the company and its directors have violated the provisions of Section 12(1) of the SEBI Act and Regulation 3(1) of the IA Regulations.

The Adjudicating Authority further observed that Noticee 2 and Noticee 3 were the directors of the Company when the unregistered investment advisory activities were committed as is clear from the Board Resolutions and signatures affixed for the purpose of opening account with the banks.

Therefore, the liability of all the actions shall be on the directors of the company. The directors were acting under the garb of the company and all the acts and provision of services of investment advisories was by Noticee 2 and Noticee 3.

On the aspect of segregation of liability amongst the directors, SEBI observed that there was a complete control of Noticee 2 on the bank accounts of the company concerned. The authority observed it that the inclusion of Noticee 3 as a director and as a shareholder was limited to satisfy the conditions stipulated in Sections 3 and Section 149 of the Companies Act, which require a private company to have a minimum of two shareholders and two directors and on the basis facts of the present case, the Adjudicating Authority concluded that there is a distinction between the roles of both the directors i.e.,  Noticee 2 and Noticee 3 while handling the affairs of the Company.

It is clear that Noticee 2 was guiding the operation of the bank account of the Company and as an extension its affairs. Hence concluding that Noticee 3 by becoming a director and shareholder of the company, and being aware of the activities of the Company had facilitated Noticee 1 and Noticee 2 in carrying out unregistered investment advisory activities. However, it was also found that Noticee 3 was controlling the affairs of the Company or was the beneficiary of any funds received in the Company’s account from clients/investors.

On the issue of the amount mobilized through unregistered investment advisory services the Adjudicating Authority observed that Noticee 1 was carrying out unregistered investment advisory activities. It has also been established that the bank account is maintained and was being used to receive fees/funds in respect of the unregistered investment advisory services carried out by Notice 1. No reply has been received from the Noticees. Accordingly, it is considered that all credits in the said bank account of Noticee 1 are proceeds of unregistered investment advisory services.

The Adjudicating Authority in the exercise of powers conferred under sections 11(1), 11 (4) and 11B (1) of the SEBI Act adjudged that Noticee 1 and Noticee 2 shall within a period of three months from the date of coming into force of this Order, jointly and severally, refund the money received from investors/clients. The remaining balance amount shall be deposited with SEBI by Noticee 1 and Noticee 2 which shall be after one year deposited in the Investors Protection and Education Fund, maintained by SEBI.

Noticee 1 and Noticee 2 shall cause to effect a public notice in all the editions of two National Dailies and in one local daily with wide circulation, inviting claims from investors/clients within a period of fifteen days from the date of this Order. And further, the repayments to the investors/clients shall be effected only through Bank Demand Draft or Pay Order or Electronic Fund Transfer or through any other appropriate banking channel, which ensures audit trails to identify the beneficiaries of repayments. Noticee 1 and Noticee 2 shall file a report of such completion of repayments with SEBI.

The Adjudicating Authority further directed that the Noticee 1 and Noticee 2 are restrained from selling their assets and properties. Further, banks are directed to permit debit from the bank accounts of Noticee 1 and Noticee 2, only for the purpose of making refunds to the clients/investors and for depositing the balance amount with SEBI.

By way of the SEBI’s order, the Noticee 1 and Noticee 2 are debarred from accessing the securities market, and are prohibited from buying, selling or otherwise dealing in securities for a period of three years. Noticee 3 is debarred from accessing the securities market, directly or indirectly and is prohibited from dealing in securities, in any manner, for a period of one year from the date of this Order. The Noticees shall not undertake, either during or after the expiry of the periods of debarment, investment advisory services or any activity in the securities market without obtaining a Certificate of Registration from SEBI, as required under securities laws.

AMLEGALS REMARKS

Section 11 (2)(b) of SEBI Act empowers SEBI to register and regulate working of Investment Advisors and such other intermediaries who may be associated with securities market in any manner.

Investment Advisors tend to call themselves by varied names viz. wealth managers, private bankers etc. This causes much confusion as to their role and responsibility. Hence the regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an Investment Advisor under the regulations.

On the other hand any person who has obtained the certificate of registration as an Investment Advisor must necessarily use the word “investment advisor” in his name. SEBI has attempted to make sure that the term “investment advisor” has coverage of the widest sense.

The recent order of the SEBI has placed the emphasis on the need for the registration of Investment Advisors under SEBI Regulations and, that no person can earn profits through any kind of investment advice (including automated buy/sell signals on website) without being duly registered.

– Team AMLEGALS, assisted by Ms. Samiha Yadav (Intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or mridusha.guha@amlegals.com.