Order – M/S Money Market Manthan Financial Services

WTM/ASB/WRO/WRO/27887/2023–24

SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

ORDER

UNDER SECTIONS 11(1), 11(4) AND 11B(1), 11(4A) AND 11B(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992.

IN RESPECT OF – 

 IN THE MATTER OF M/S MONEY MARKET MANTHAN FINANCIAL SERVICES.

1. Securities and Exchange Board of India (“SEBI”) had conducted an Inspection of M/s Money Market Manthan Financial Services (“MMMFS /Noticee 1”), a SEBI registered Investment Adviser bearing registration No. INA000005465, for the period from April 1, 2018 to March 2, 2020 (“Inspection”). The Proprietor of MMMFS is Vicky Kamariya (“Noticee 2”).

2. The aforementioned Inspection was carried out between March 2–4, 2020, to examine compliance by MMMFS, with regulatory requirements stipulated under the SEBI Act, 1992 (“SEBI Act”), SEBI (Investment Advisers) Regulations, 2013 (“Investment Adviser Regulations, 2013”) and other Circulars, Guidelines, etc. framed thereunder. During the Inspection on March 4, 2020, the office of MMMFS was also raided by the Crime Branch of Indore Police.      

3. On the basis of findings contained in the Inspection Report, SEBI issued a show cause notice dated May 23, 2022, to Noticees 1 and 2 (“SCN”) inter alia alleging violations of the provisions of the SEBI Act, the Investment Adviser Regulations and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PUFTP Regulations 2003”). The violations alleged in the SCN are reproduced and discussed at paragraph 9 of this Order.   

4. Vide the SCN, the Noticees were also called upon to show cause as to why suitable directions under Sections 11(1), 11(4) and 11B(1) along with Sections 11(4A) and 11B(2) of the SEBI Act, should not be issued against them for the violations alleged in the SCN.

5. The details with regard to service of SCN are provided as under:

6. The Noticees did not file a reply to the SCN subsequent to its service through newspaper publication.

7. It is pertinent to note that SEBI had also initiated parallel enforcement proceedings under the provisions of the SEBI Act and the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations, 2008”), against Noticee 1 vide an SCN dated March 2, 2022 (“Enquiry SCN”) as to why action as recommended including cancellation of Certificate of Registration should not be taken against Noticee 1. An opportunity of hearing in the aforementioned enquiry proceedings was granted to Noticee 1 on July 14, 2022, wherein it had appeared through an authorised legal representative.  Thereafter, the Noticee had filed a reply dated July 18, 2022, through its Proprietor, Noticee 2.  

8. In the instant proceedings, an opportunity of hearing was granted to Noticees 1 and 2 on August 25, 2022. The Noticees did not appear for the hearing. 

However, vide an e–mail dated August 5, 2022, the Noticee had requested that the Noticees’ reply dated July 18, 2022, to the Enquiry SCN be considered by SEBI.  Accordingly, the contents of the aforementioned reply have been reproduced and discussed in the subsequent paragraphs of this Order

FINDINGS

9. I have considered the allegations contained in the SCN dated May 22, 2022 along with the reply dated July 18, 2022, filed by the Noticees. The following violations have been alleged against the Noticees in the SCN:

A. Failure to furnish complete information to SEBI in violation of Regulations 13(a), 15(12), 25(1) and (2) read with Regulations 24(3), Clause 8 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.  

B. Failure to maintain records of communications with clients during risk profiling and suitability assessment, selection of advisory products/ services in violation of Regulations 19(1) and (2) of the Investment Adviser Regulations, 2013.

C. Divulgence of confidential information of clients through sharing of SCORES portal credentials with a third party in violation of Regulation 15(6), Clause 4 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

D. Promising assured and unrealistic returns to their clients in violation of Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(k) and (s) of the PFUTP Regulations, 2003.

E. Mis–representation and mis–selling of products/ services by the Noticees through its employees employing fake names and designations, making false assurances, displaying fabricated client testimonials and claims regarding investment advice service performances on Noticee 1’s website, in violation of Regulation 15(1), Clause 1 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013 and also Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(k) and (s) of the PFUTP Regulations, 2003.

F. Failure to ensure compliance by their employees, with the qualification/ certification requirements contained under the Investment Adviser Regulations, 2013, in violation of Regulations 7, 15(13) and Clauses 1, 2, 3 and 8 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

G. Failure to redress investor complaints received on SCORES including delay in submission of Action Taken Report (“ATR”) in violation of SEBI Circular No. CIR/OIAE/1/2014 dated December 18, 2014 (“Circular dated December 18, 2014”) read with Regulation 21 of the Investment Adviser Regulations, 2013.

G. Failure to carry out adequate and appropriate risk profiling of their clients including failure to communicate risk profiling form upon completion thereon in violation of Regulation 15(1) and Clauses 1, 2 and 8 of the Code of Conduct specified in Schedule III read with Regulation 15(9), Regulation 16(e) of the Investment Adviser Regulations, 2013, Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003.

H. Sale of multiple services and collection of unreasonably high advisory fees from their clients in violation of Regulations 15(1), 17(a), (b), (c), (d) and (e) of the Investment Adviser Regulations, 2013 and Clauses 1, 2 and 6 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

I. Failure to make adequate disclosures to their clients regarding its association with other intermediaries, investing activities and trading, sharing of confidential information of their clients, etc. in violation of Regulations 18(1), (4) and (6) and Clauses 1, 2, 5 and 7 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

J. Failure to ensure compliance with Anti–Money Laundering Policy on account of not having a ‘Principal Officer’ and failure to inform the Financial Intelligence Unit, New Delhi (“FIU”) regarding the said fact in violation of  SEBI Circular No. ISD/CIR/RR/AML/1/06 dated January 18, 2006 (“Circular dated January 18, 2006”).  

10. The relevant provisions are as under:

PROVISIONS OF THE SEBI ACT:  

Section 12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

PROVISIONS OF THE PFUTP REGULATIONS:  Regulation 2(1)(c): 

(c) “fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include—

(1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;

(2) a suggestion as to a fact which is not true by one who does not believe it to be true;

(3) an active concealment of a fact by a person having knowledge or belief of the fact;

(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless manner whether it be true or false;

(6) any such act or omission as any other law specifically declares to be fraudulent,

(7) deceptive behaviour by a person depriving another of informed consent or full participation, 

(8) a false statement made without reasonable ground for believing it to be true.

(9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.

 And “fraudulent” shall be construed accordingly … 

 Regulation 3. No person shall directly or indirectly— 

• buy, sell or otherwise deal in securities in a fraudulent manner;
• use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;
• employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;
• engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

Prohibition of manipulative, fraudulent and unfair trade practices

Regulation 4. No person shall directly or indirectly— 

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a 4[manipulative,] fraudulent or an unfair trade practice in securities 5[markets].

(2) Dealing in securities shall be deemed to be a 7[manipulative] fraudulent or an unfair trade practice if it involves 8[any of the following]: –

(k) disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities;]

(s) mis-selling of securities or services relating to securities market;

PROVISIONS OF THE INVESTMENT ADVISERS REGULATIONS:  

Regulation 7: Qualification and certification requirement

Regulation 7(1) An individual registered as an investment adviser under these regulations and partners and representatives of an investment adviser registered under these regulations offering investment advice shall have the following minimum qualifications, at all times:

(a) A professional   qualification   or   post-graduate   degree   or   post   graduate   diploma   in   finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association; or

(b) A graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.

Regulation 7(2) An individual registered as an investment adviser and partners and representatives of investment advisers registered under these regulations offering investment advice shall have, at all times, a certification on financial planning or fund or asset or portfolio management or investment advisory services: (a) from NISM; or

(b) from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM …

Regulation 13: Conditions of Certificate

Regulation 13(a): The certificate granted under Regulation 9 shall, inter alia, be subject to the following conditions:

(a) the investment adviser shall abide by the provisions of the Act and these Regulations;

Regulation 15: General Responsibility

Regulation 15(1): An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.

Regulation 15(6): An investment adviser shall not divulge any confidential information about its client, which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force.

Regulation 15(9): An investment adviser shall abide by Code of Conduct as specified in Third Schedule:

THIRD SCHEDULE

CODE OF CONDUCT FOR INVESTMENT ADVISER

1. Honesty and fairness: An investment adviser shall act honestly, fairly and in the best interests of its clients and in the integrity of the market.
2. Diligence: An investment adviser shall act with due skill, care and diligence in the best interests of its clients and shall ensure that its advice is offered after thorough analysis and taking into account available alternatives.
3. Capabilities: An investment adviser shall have and employ effectively appropriate resources and procedures which are needed for the efficient performance of its business activities.
4. Information about clients: An investment adviser shall seek from its clients, information about their financial situation, investment experience and investment objectives relevant to the services to be provided and maintain confidentiality of such information.
5. Information to Clients: An investment adviser shall make adequate disclosures of relevant material information while dealing with its clients.
6. Fair and reasonable charges: An investment adviser advising a client may charge fees, subject to any ceiling as may be specified by the Board ⁸⁵[***]. The investment adviser shall ensure that fees charged to the clients is fair and reasonable
7. Conflicts of Interest: An investment adviser shall try to avoid conflicts of interest as far as possible and when they cannot be avoided, it shall ensure that appropriate disclosures are made to the clients and that the clients are fairly treated.
8. Compliance: An investment adviser including its [partners, ‘Principal Officer’ and persons associated with investment advice] shall comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market.

Regulation 15(12): Investment advisers shall furnish to the Board information and reports as may be specified by the Board from time to time. 

Regulation 15(13): It shall be the responsibility of the Investment Adviser to ensure that its representatives and partners, as applicable, comply with the certification and qualification requirements under Regulation 7 at all times.

Regulation 16: Risk profiling: 

Investment adviser shall ensure that:

(b)   it has a process for assessing the risk a client is willing and able to take, including: (iii) appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers.

(e)  risk profile of the client is communicated to the client after risk assessment is done;

Regulation 17: Suitability

Investment adviser shall ensure that, –

• All investments on which investment advice is provided is appropriate to the risk profile of the client
• It has a documented process for selecting investments based on client’s investment objectives and financial situation
• It understands the nature and risks of products or assets selected for clients
• It has a reasonable basis for believing that a recommendation or transaction entered into:
  • Meets client’s investment objectives
  • Is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance
  • Is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.
• Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients’ experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss

Regulation 18: Disclosures to Clients

Regulation 18(1): An   investment   adviser   shall   disclose   to   a   prospective   client, all   material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and such other information as is necessary to take an informed decision on whether or not to avail its services.

Regulation 18(4): An investment adviser shall disclose to the client its holding or position, if any, in the financial products or securities which are subject matter of advice. 

Regulation 18(6): An investment adviser shall, while making an investment advice, make adequate disclosure to the client of all material facts relating to the key features of the products or securities, particularly, performance track record.

Regulation 19: Maintenance of records

Regulation 19(1) An investment adviser shall maintain the following records:

• Know Your Client records of the client;
• Risk profiling and risk assessment of the client;
• Suitability assessment of the advice being provided;
• Copies of agreements with clients, if any.
• Investment advice provided, whether written or oral;
• Rationale for arriving at investment advice, duly signed and dated;
• A register or record containing list of the clients, the date of advice, nature or the advice, the products /securities in which advice was rendered and fee, if any charged for such advice.

Regulation 19(2) All records shall be maintained either in physical or electronic form and preserved for a minimum period of five years:

Provided that where records are required to be duly signed and are maintained in electronic form, such records shall be digitally signed. 

Regulation 21: Redressal of client grievances

Regulation 21(1) An investment adviser shall redress client grievances promptly.

Regulation 21(2) An investment adviser shall have adequate procedure for expeditious grievance redressal.

Regulation 21(3) Client grievances pertaining to financial products in which investments have been made based on investment advice, shall fall within the purview of the regulator of such financial product.

Regulation 21(4) Any dispute between the investment adviser and his client may be resolved through arbitration or through Ombudsman authorized or appointed for the purpose by any regulatory authority, as applicable.

Regulation 24: Notice before Inspection

Regulation 24(3): During the course of an inspection, the investment adviser against whom the inspection is being carried out shall be bound to discharge its obligations as provided in regulation 25.

Regulation 25: Obligation of investment adviser on inspection. 

Regulation 25(1): It shall be the duty of every investment adviser in respect of whom an inspection has been ordered under the regulation 23 and any other associate person who is in possession of relevant information pertaining to conduct and affairs of such investment adviser, including ^40[partners, directors,

‘Principal Officer’ and persons associated with investment advice], if any, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with such statements and information as the inspecting authority may require for the purposes of inspection.  Regulation 25(2): It shall be the duty of every investment adviser and any other associate person who is in possession of relevant information pertaining to conduct and affairs of the investment adviser to give to the inspecting authority all such assistance and shall extend all such co-operation as may be required in connection with the inspection and shall furnish such information as sought by the inspecting authority in connection with the inspection.”

SEBI Circular CIR/OIAE/2014 dated December 18, 2014

“… 9. All listed companies and SEBI registered intermediaries shall review their investors grievances redressal mechanism so as to further strengthen it and correct the existing   shortcomings, if   any.   The   listed   companies   and   SEBI   registered   intermediaries to whom complaints are forwarded through SCORES, shall take immediate efforts on receipt of a complaint, for its resolution, within thirty days. The listed companies and SEBI registered intermediaries shall keep the complainant duly informed of the action taken thereon. 

10. The listed companies and SEBI registered intermediaries shall update the ATR along with supporting documents, if any, electronically in SCORES. ATR in physical form need not be sent to SEBI. The proof of dispatch of the reply of the listed company / SEBI registered intermediary to the concerned investor should also be uploaded in SCORES and preserved by the listed company / SEBI registered intermediary, for future reference. 

11.Action taken by the listed companies and SEBI registered intermediaries will not be considered as complete if the relevant details/ supporting documents are not uploaded in SCORES and consequently, the complaints will be treated as pending.

12. A complaint   shall   be   treated   as   resolved/disposed/closed   only   when   SEBI   disposes/closes the complaint in SCORES.  Hence, mere filing of ATR by a listed company or SEBI registered intermediary with respect to a complaint will not mean that the complaint is not pending against them. 

13. Failure by listed companies and SEBI registered intermediaries to file ATR under SCORES within thirty days of date of receipt of the grievance shall not only be treated as failure to furnish information to SEBI but shall also be deemed to constitute non-redressal of investor grievance…”

SEBI Circular ISD/CIR/RR/AML/1/06 dated January 18, 2006

“… All intermediaries are advised to ensure that a proper policy framework as per the Guidelines on anti-money laundering measures is put into place within one month from the date of the circular. The intermediaries are also advised to designate an officer as ‘Principal Officer’ who would be responsible for ensuring compliance of the provisions of the PMLA. Names, designation and addresses (including e-mail addresses) of ‘Principal Officer’ shall also be intimated to the Office of the Director-FIU, 6th Floor, Hotel Samrat, Chanakyapuri, New Delhi 110021, India on an immediate basis…”

11. I shall now proceed to deal with the violations alleged against the Noticees in light of the reply submitted by them.

A. Failure to furnish complete information to SEBI in violation of Regulations 13(a), 15(12), 25(1) and (2) read with Regulations 24(3), Clause 8 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013.

B. Failure to maintain records of communications with clients during risk profiling and suitability assessment, selection of advisory products/ services in violation of Regulations 19(1) and (2) of the aforementioned Regulations.

11.1 The Noticees allegedly failed to provide information to SEBI in relation to the pre–inspection questionnaire and the client master data. The Noticees also allegedly failed to maintain records of communications with clients during risk profiling and suitability assessment, selection of advisory products/ services.

11.2 In their reply, the Noticees inter alia submitted as under:

a. The Noticee is a SEBI registered Investment Adviser since August 29, 2016. During the Inspection conducted by SEBI, the Noticee had cooperated in the best possible manner and had provided all the requisite documents and information.

b. The Noticee had maintained all the requisite records mentioned in Regulation 19(1) of the Investment Adviser Regulations, 2013 including KYC records of clients, rationale for /records of advice as well as Compliance Audit Report. Further, telephone records were not required to be maintained earlier but only came into effect from January 2021 and further, no investment advice was provided telephonically.  Hence, the Noticees did not violate Regulations 19(1) and (2) of the Investment Adviser Regulations, 2013. 

11.3 From the material available on record, the following is noted:

i. Vide a letter dated February 11, 2020, SEBI while informing Noticee 1 that an inspection of its books of accounts, records and other documents pertaining to its registration as an investment adviser would be carried out under Regulation 23 of the Investment Adviser Regulations, 2013, had advised the Noticee to send its reply to the pre–inspection questionnaire latest by February 26, 2020.

ii. Vide a reply dated February 26, 2020, Noticee 1 informed SEBI that as two members of its compliance team were on leave, it could not collect the data in the requisite format to provide to SEBI. Accordingly, Noticee 1 sought an extension from SEBI to submit the information by March 5, 2020, which request was not acceded to vide SEBI e–mail dated February 26, 2020.  Further, vide the said e–mail, SEBI informed Noticee 1 that the inspection would commence from March 2, 2020, onwards. 

iii. However, vide an e–mail dated February 27, 2020, the Noticees submitted that a data theft had occurred at their premises for which a complaint at the concerned police station at Indore was also filed by them. Thereafter, vide an e–mail dated March 2, 2020, the Noticees provided an incomplete client master data to the SEBI Inspection team.  

iv. It is pertinent to note that through the pre–inspection questionnaire dated February 11, 2020, SEBI had sought information from the Noticees inter alia regarding details of clients, copies of agreements entered into with and advice provided to such clients including the rationale for such advice, fee structure, fees collected, investor complaints received, etc. However, the Noticees failed to provide a response to the pre–inspection questionnaire.  The Inspection conducted by SEBI was to verify the compliance level of Noticee 1 with regards to requirements stipulated under the Investment Adviser Regulations, 2013.  In this context, the pre–inspection questionnaire serves as an important requirement for the Noticees to ensure availability of documents/ information prior to the Inspection for verification thereafter, during the Inspection.  Such documents/ information assist SEBI in determining whether there exist any discrepancies or non–compliance with the aforementioned Regulations, by the Noticees.  In failing to submit a response to the pre–inspection questionnaire, the Noticees had violated the provisions of Regulations 13(a), 15(12), 25(1) and (2) read with Regulations 24(3), Clause 8 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013.    

v. It is also noted that the information concerning client master data, as submitted by the Noticees and which was analyzed by SEBI on a sample basis, was incomplete since it did not contain details of all clients of Noticee 1. For example, a complainant, Angad Chopraa, who had availed of investment advisory services offered by the Noticee during the Inspection period, surprisingly did not find a mention in the client master data submitted by the Noticees to SEBI.  In addition, the total advisory fees collected from another client, Raghavendra Uppur was also not available on the client master data submitted by the Noticees. The availability of a complete client master data would have ensured that the Noticees had a single source of record for all their customers/ clients including details of their transactions, KYC details, fees collected, etc.  However, the Noticees failed to submit full and complete client master data to SEBI in violation of the provisions of the Investment Adviser Regulations, 2013.  

vi. The aforementioned failure by the Noticees cannot be looked at in isolation. It is noted that in these proceedings, the Noticees were also alleged to have failed to maintain communication records made with clients during risk profiling and suitability assessment, selection of advisory products/ services, etc. In this context, it is noted from the material on record that risk profiling/ sales/ offers for products, services, etc. were made by the Noticees (through their employees) to prospective and existing clients over telephone.  Similarly, advice/ guidance to clients regarding selection/ suitability of services/ products were also made over telephone and thereafter, all investment advice for said services/ products would automatically flow to such clients.  The Noticees admittedly did not maintain a record of such communications with their clients citing the ground that under the Investment Adviser Regulations, 2013, no such requirement was specified by SEBI up until January 1, 2021 (the Circular was issued in September 23, 2020 but was made effective only from January 1, 2021).  However, while the requirement for maintenance of call records did indeed only come about in January 2021, the Noticees were nonetheless mandated to ensure maintenance of records specified under Regulation 19(1) of the Investment Adviser Regulations, 2013 including risk profiling and risk assessment, rationale, records of advice, etc.  Further, as per the compliance audit report for the period 2018–19, the Noticees had failed to make available, the call register to the concerned Auditor, who thereafter had opined that the Noticees had failed to comply with the requirement for maintenance of records.  In addition, where the Noticees had carried out a revision of the risk profile of their clients, the supporting documents evidencing the reasons for the change in risk profile and acceptance/ acknowledgment by the concerned clients of the revised risk scores, were also not provided by them, to SEBI.  The Noticee has therefore, failed to ensure maintenance of records as required under the provisions of the Investment Adviser Regulations, 2013.      

vii. Against the charge of non–cooperation with SEBI in supplying information sought for by the regulator i.e. Calling Server Central Processing Unit, the Noticees had contended that the same was on account of a data theft by an ex–employee and accordingly, a complaint dated January 20, 2020 (along with a reminder dated February 27, 2020) was filed with the Indore Police regarding the aforesaid matter. Further, vide an e–mail dated February 27, 2020, the Noticees had informed SEBI that a complaint was filed with the Indore Police in the matter.  In this regard, it is pertinent to note that the Noticees had earlier not provided any information in respect of call records to the Auditor (see paragraph 11.6), which was prior to the period of the data theft by their ex–employee. 

Further, the information regarding the data theft was provided to SEBI only on February 27, 2020, despite the same having occurred much before the date of communication of Inspection by SEBI i.e. vide letter dated February 11, 2020.  Incidentally, the office premises of Noticee 1 was subsequently raided by the Indore Police on March 4, 2020.  However, having regard to the fact that a complaint was filed by the Noticees in the matter, I am inclined to accept their contentions regarding non–submission of information sought for by the regulator i.e. Calling Server Central Processing Unit.         

viii. Regulation 13(a) of the Investment Adviser Regulations, 2013 mandates that an Investment Adviser shall abide by the provisions of SEBI Act and the Investment Adviser Regulations, 2013. Regulation 15(12) of the Investment Adviser Regulations, 2013 mandates that the Investment Advisers shall furnish the information sought by SEBI.  In terms of Regulations 24(3), 25(1) and (2) of the Investment Adviser Regulations, 2013, the obligation is on the Investment Adviser to furnish the information sought by the Inspecting Authority for the purpose of Inspection.  Regulation 15(9) of the Investment Adviser Regulations, 2013 mandates that an Investment Adviser shall abide by the code of conduct as specified in the Third Schedule of the Investment Adviser Regulations, 2013.  

ix. With respect to the non–submission of the call recording data, I am inclined to accept the submission of the Noticee. However, with respect to the remaining information sought by the Inspecting Authority / Team, I find that the Noticees did not submit complete information and hence violated Regulations 13(a), 15(12), 25(1) and (2) read with Clause 8 of the Code of Conduct of Investment Advisers as specified under Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013.    

C. Divulgence of confidential information of clients through sharing of SCORES portal credentials to a third party in violation of Regulation 15(6), Clause 4 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

11.10 The Noticees were alleged to have divulged sensitive /confidential client information to a third party in violation of the Regulations 15(6), 15(9) read with Clause 6 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013.

11.11 In their reply, Noticees 1 and 2 submitted as under:

a. The Noticee used to take professional assistance from Ms. Akansha Mongia for resolution of clients’ grievances, which was the reason why complaints were forwarded to her. There was no requirement to have an agreement between the Noticee and her for any professional assistance.  

b. Further, the SCORES credentials were provided by the Noticee to her for ensuring resolution of clients’ grievances and not with a view to share confidential information. Accordingly, there is no violation of Regulation 15(6) and Clause 4 of the Code of Conduct specified in the Investment Adviser Regulations, 2013.

11.12 From the material available on record it is observed that the Noticees admittedly taken the assistance of one, Akansha Mongia, a third party who was neither employed nor had any formal agreement with the Noticee, for the processing of clients’ complaints. The Noticees admittedly mailed clients’ complaints to Akansha Mongia at [email protected] while also sharing SEBI Complaints Redress System (“SCORES”) credentials with her. In their reply, the Noticees have also accepted the aforementioned facts.  

11.13 Regulation 15(6) of the Investment Adviser Regulations, 2013 mandates that an Investment Adviser shall not divulge any confidential information about its clients. Further, Regulation 15(9) read with Clause 4 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013 mandates that an Investment Adviser shall abide by Code of Conduct and shall maintain confidentiality of the Client’s information.  In view of the preceding paragraph, I find that the Noticees had violated the aforementioned provisions of the Investment Adviser Regulations, 2013.       

D. Promising assured and unrealistic returns to their clients in violation of Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(k) and (s) of the PFUTP Regulations, 2003.

E. Mis–representation and mis–selling of products/ services by the Noticees through their employees employing fake names and designations, making false assurances, displaying fabricated client testimonials and claims regarding investment advice service performances on Noticee 1’s website, in violation of Regulation 15(1), Clause 1 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013 and also Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(k) and (s) of the PFUTP Regulations, 2003.

11.14 The Noticees were alleged to have made false and misleading representations to their clients by promising them assured and unrealistic returns thereby violating Regulation 3(a), (b), (c) and (d), 4(1), 4(2)(k) and (s) of the PFUTP Regulations, 2003 read with Section 12A(a), (b) and (c) of the SEBI Act. The Noticees were also alleged to have misrepresented their sales team and advices/ services on Noticee 1’s website and had made false claims about their performance and accuracy of services thereby violating Regulation 15(1), Clause 1 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013.  Further, the Noticees were alleged to have indulged in mis–representation and mis–selling of products/ services in order to induce clients to avail of investment advisory services in violation of Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1) and 4(2)(k) and (s) of the PFUTP Regulations, 2003.

11.15 In their reply, Noticees 1 and 2 submitted as under:

a. The Noticee did not offer /provide any guaranteed returns, which was also mentioned on Noticee 1’s website. Further, in the ‘welcome mail’ sent to the clients while onboarding them, the following was clearly mentioned: “Stock market has inherent market risk; hence, we do not claim any profit guaranteed services.  Noticee 1 do not provide any profit sharing services, guaranteed service and services which are not mentioned (on) our website.  If any person tries to sell such type of product kindly call on customer care number.”  Snapshot of one ‘welcome mail’ is attached as Annexure 1.

b. With respect to the WhatsApp chat conversation mentioned in the SCN, SEBI has misinterpreted the same as the Noticee was trying to illustrate the accuracy levels which was just a marketing tool done to sell a product. In no way were returns guaranteed and clients were made aware of the same.  Hence, the Noticee did not misrepresent the truth nor was there any fraud carried out in violation of the PFUTP Regulations, 2003.

11.16 However, as regards the allegation regarding mis–representation and mis– selling of products/ services, no reply was furnished by the Noticees.

11.17 From the material available on record and contrary to the Noticees’ contentions, the website www.moneymarketmanthan.com had indeed contained a promise of assured profit/ unrealistic returns to prospective clients through the following statement on such website: 

“Equity Cash Intraday: You are definitely going to make profits if you make investments on the basis of stock cash tips given by our team who solely work for researching the news and stocks. You can subscribe our services at reasonable package and then get up to intraday basis calls every day, weekly and monthly reports, chat sessions and dedicated customer service support for becoming a successful trader and make big profits with small investments on regular basis”.

11.18 It is therefore, not a surprise that the client master data submitted by the Noticees, to SEBI, revealed that the highest fees were collected by them in the ‘Equity Cash Intraday’ service i.e. Rs. 14.59 Lakh out of the total fees of Rs. 54.78 Lakh received in the Financial Year 2018–19 and Rs. 23 Lakh out of Rs. 85.66 Lakh in the Financial Year 2019–20.     

11.19 In addition, the Noticees’ contention regarding usage of marketing tools cannot be accepted since they were also claiming to offer returns on investments even through WhatsApp messages as seen from the exchange on such media between their employees and the complainant, Angad Chopraa, as under: 

a. Complainant: “One question, after this payment would I also have to buy any additional service or would this be good for the month?”

Noticees’ employee: “Sir, HNI service he 4.60 Lakh ki.”

Complainant: “Monthly or yearly?”

Noticees’ employee: “Registration charge he.  One–year service. Aap call ki quality bhi to dekho.  Future me 8 se 10 rupaye ka target kon deta.”

Complainant: “Mahine ke aur kya charges lagenge”

Noticees’ employee: “4.60 (Lakh) ka pura service padega mimimum 22 lac nikal kar aayega aapke investment pe. Ye aapka complete package rahega.”

b. Noticee’s employee: “Sir gali dene se apko kya mila. Me kal election ke result me jitna mangoge profit dunga bat to karo”

Complainant: “Ok call, let me see what tip you give now, earlier there was a major loss”

Noticees’ employee: “Sir jb bhi ho jaye aap call kr li jiyega”

Noticees’ employee: “Sir agar aap interested ho to company ka bank detail bhej diya payment kar ke call kar dena apne itni company pr trust kiya 1 bar meri company pr karo”

Noticees’ employee: “Bhale sir wek me 3 din work karunga pr sure karunga”

Noticees’ employee: “Or sir kal election ka bahut bada report bhale trust ke liye 1 lot me work kar lena agar apki soch se 3 guna profit na ho to mujhe bolna…”

c. Complainant: “Dhfl sold at 118.80 June contract”

Noticees’ employee: “Ok”

Complainant: “Loss booked of Rs. 120000 as per your instructions”

Complainant: “Loss booked of Rs. 160000 as per your trading advise”

11.20 Further, from the material available on record, it is noted that:

a. An analysis of clients’ complaints revealed that the Noticees’ employees had used fake names and designations, made false assurances to lure clients to subscribe to the products/ services offered by the Noticees. Further, in the case of the complainant, Angad Chopraa, the Noticees had admitted that three of their employees had used false names to deal with the said client.  The Noticees had therefore, misrepresented their sales team and also made false claims about their performance and accuracy of services with the sole intention of inducing prospective clients to avail of their advisory services.  

b. The testimonials on the Noticees’ website displayed claims of clients stating that with the help of the services provided by Noticees, they had made huge profits and were very much satisfied with the accuracy of investment advice given by Noticees. However, when SEBI had enquired about the details of such clients, the Noticees themselves admitted that no such clients were available on their database.  

11.21 Accordingly, I find that the Noticees had failed in their responsibility to act in fiduciary capacity to their clients. The aforementioned amounted to a violation of Regulations 15(1), (9) read with Clause 1 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013.

11.22 Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003 inter alia state that no person (including a registered intermediary) shall directly or indirectly use or employ any scheme or device to defraud in connection with dealing in securities; or engage in any act, practice, course of business which operates as fraud or deceit upon any person (clients) in connection with any dealing in securities in contravention of the provisions of the said Act or the Rules and Regulations made thereunder.

11.23 The Noticees’ conduct (as detailed in the preceding paragraphs) expose the deceptive devices adopted by them to defraud their clients in connection with their dealings in securities notwithstanding the contents of the ‘welcome mail’. The aforementioned was done to induce prospective clients to avail of their advisory services thereby ensuring maximization of their income through fees collected under investment advisory services.  The Noticees have clearly disregarded the interest of their clients.  In my considered view, the deceptive devices employed by the Noticees are covered within the definition of ‘fraud’ under Regulation 2(1)(c) of the PFUTP Regulations, 2003 and therefore, amount to a violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d), 4(1), 4 (2)(k) and (s) of the PFUTP Regulations, 2003.

F. Failure to ensure compliance by their employees, with the qualification/ certification requirements contained under the Investment Adviser Regulations, 2013, in violation of Regulations 7, 15(13) and Clauses 1, 2, 3 and 8 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

11.24 It was alleged that the employees /representatives of Noticee 1 did not have requisite qualifications /certification necessary for dealing with clients in violation of Regulation 7 read with Regulations 15(3), 15(9) and Clauses 1, 2, 3 and 8 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013.

11.25 In their reply, Noticees 1 and 2 submitted as under:

a. Noticee 2 was the only person who was involved in assessing the risk profile of the clients and rendering investment advice. The employees appointed by him were only for assisting in collating data from clients.  Further, the recommendations were provided by Noticee 2 to the clients through SMS. 

b. The requirement for qualification of sales staff came in September 2020 through a SEBI Circular ‘Guidelines for Investment Advisers’ and earlier, there was no such qualification criteria for employees. Hence, the Noticees did not violate Regulation 7 and Clauses 1, 2, 3 and 8 of the Code of Conduct specified in the Investment Adviser Regulations, 2013.  

11.26 As has been noted in the preceding paragraphs, sales/ offers for products, services, etc. were made by the Noticees (through their employees) to prospective and existing clients over telephone. Similarly, advice/ guidance to clients regarding selection/ suitability of services/ products were also made over telephone and thereafter, all investment advice for such services/ products would automatically flow to such clients (see also paragraph 11.19 wherein extracts of WhatsApp messages have been reproduced and which show that investment advice was given by the Noticees’ employees).  It is reiterated that the Noticees failed to provide information (call records) of the aforesaid activities to SEBI.  While the Noticees have sought to argue that investment advice was only given by Noticee 2, the aforesaid activities on the other hand, do reveal that the Noticees had indeed engaged the services of their employees, for dealing with clients.  Further, from the employees’ list/ sales executives of the Noticee 1’s sales department submitted vide its letter dated March 3, 2020 (in reply to SEBI’s letter dated March 3, 2020), it is observed that none of the said employees had the requisite qualification/ certification, which was specified under Regulation 7 of the Investment Adviser Regulations, 2013.  

11.27 The aforementioned activities of the Noticees’ employees along with the failure by the Noticees to ensure compliance with the requirements for appropriate qualifications and certifications under the Investment Adviser Regulations, 2013, has resulted in a violation of Regulation 7 read with Regulations 15(3), 15(9) and Clauses 1, 2, 3 and 8 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013.

G. Failure to redress investor complaints received on SCORES including delay in submission of ATR in violation of Circular dated December 18, 2014 read with Regulation 21 of the Investment Adviser Regulations, 2013.

11.28 The Noticees allegedly failed to promptly resolve investor grievances received on the SCORES and also failed to submit the ATR in respect of the said complaints, in a time bound manner, in violation of SEBI Circular No. CIR/OIAE/2014 dated December 18, 2014 read with Regulation 21(1) of the Investment Adviser Regulations, 2013.

11.29 In their reply, Noticees 1 and 2 submitted as under:

a. The delay in resolving complaints were on account of the clients not responding to the Noticee’s calls /e–mails. Further, in a few cases, the final negotiations took several days.  However, the Noticees had filed the ATR in a timely manner as can be seen from the following complaints wherein ATR is also attached.  

b. Hence, the Noticees did not violate the provisions of the SEBI Circular, CIR/OIAE/1/2014 dated December 18, 2014.:

11.30 From the data of complaints filed against the Noticees on SCORES, it was observed that as on July 31, 2020, there were 8 out of 44 complaints which had been pending for more than 100 days, as under:

11.31 The Circular dated December 18, 2014 casts an obligation on all SEBI registered intermediaries to take immediate action in resolving complaints within a period of thirty days and thereafter, file an ATR with SEBI. Further, Regulation 21(1) of the Investment Adviser Regulations, 2013 inter alia states that an Investment Adviser shall promptly redress clients’ grievances.  In the instant proceedings, the Noticees have submitted that in 5 out of 8 complaints mentioned in the SCN, ATR were filed in a timely manner.  From the aforesaid, it is clear that the Noticees had admittedly failed to address 3 out of the 8 complaints.  As regards the 5 complaints wherein the Noticees have claimed that ATR was filed in a timely manner, it may be mentioned that while the ATR was filed within the due date i.e. on or before expiry of 30 days from the date of receipt of complaint on SCORES, the complaints were nonetheless not redressed by the Noticees and were kept pending for more than 100 days.  It is for the said reason that reminders for redressal of grievance were also sent by SEBI, to the Noticees in respect of the aforesaid 5 complaints.  It is also pertinent to note that as on date, the aforesaid 8 complaints are still pending redressal by the Noticees.  

11.32 In view of the above, I find that the Noticees have failed to promptly resolve investor grievances received on the SCORES and also failed to submit the ATR in respect of the said complaints, in a time bound manner, in violation of SEBI Circular No. CIR/OIAE/2014 dated December 18, 2014 read with Regulation 21(1) of the Investment Adviser Regulations, 2013.

H. Failure to carry out adequate and appropriate risk profiling of their clients including failure to communicate risk profiling form upon completion thereon in violation of Regulation 15(1) and Clauses 1, 2 and 8 of the Code of Conduct specified in Schedule III read with Regulation 15(9), Regulations 16(b)(iii) and 16(e) of the Investment Adviser Regulations, 2013, Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003.

11.33 The Noticees were alleged to have failed to carry out proper risk profiling of their clients in violation of Regulation 15(1) and Clauses 1, 2 and 8 of the Code of Conduct specified in Schedule III read with Regulation 15(9) of the Investment Adviser Regulations, 2013. The Noticees had allegedly assigned disproportionately large weights to answers in respect of three questions in the risk profile form (“RPF”) offered to their clients in violation of Regulations 16(b)(iii) of the Investment Adviser Regulations, 2013.  

11.34 The Noticees were alleged to have not communicated the RPFs to their clients after completion of the risk profiling in violation of Regulation 16(e) of the Investment Adviser Regulations, 2013. The Noticees were alleged to have incorrectly categorized some of their clients under the ‘High Risk’ category thereby violating Section 12A(a), (b), (c) of the SEBI Act read with read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003.

11.35 In their reply, Noticees 1 and 2 submitted as under:

a. Risk profiling of a few of the clients was done again in order to rectify the wrong information provided by the client. However, if the client does not disclose correct details /information while doing risk profile at the initial stage itself, then the Noticees cannot be held liable.  Further, the Noticee had employed the same risk profile approved by SEBI at the time of granting registration.  Hence, questioning the correctness of the same risk profile is not sustainable. 

b. The Noticee has always communicate the clients’ risk profile via ‘welcome mail’, snapshots of which have been annexed with this reply. However, in some instances, there were delays in communicating the same. 

Nonetheless, the risk profiling of clients was always done prior to service allocation.  Therefore, the Noticees have not violated Regulation 16(e) of the Investment Adviser Regulations, 2013 nor does the aforementioned come with the purview of ‘fraud’ under the PFUTP Regulations, 2003.  

11.36 The Noticees provided the following risk score range during inspection.

11.37 Upon a sample analysis of the risk profiling carried out by the Noticees, the following was noted in respect of some of their clients:

A. Rakesh Kumar Kushwaha: Risk profiling of the aforesaid client was carried out by the Noticees on August 23, 2019, wherein he had scored 180 (Medium Risk) and September 13, 2019, wherein he had scored 340 (High Risk), respectively. The difference in the two risk profiles is provided as under:

B. Priya Sahu: Risk profiling of the aforesaid client was carried out by the Noticees on November 2, 2019, wherein she had scored 210 (Medium Risk) and November 11, 2019, wherein she had scored 330 (High Risk), respectively. The difference in the two risk profiles is provided as under:  

C. Vinay Kumar Choudhary: Risk profiling of the aforesaid client was carried out by the Noticees on June 11, 2019, wherein he had scored 210 (Medium Risk) and June 19, 2019, wherein he had scored 340 (High Risk), respectively. The difference in the two risk profiles is provided as under:

11.38 Upon a consideration of Tables IV, V and VI, it is noted that the risk profiling of the said clients was done twice, immediately and within a short period ranging from 8 to 20 days. It is inconceivable that the risk profile of the clients could have changed substantially from Medium Risk to High Risk within such a short period of time. For example, in the cases of Rakesh Kumar Kushwaha and Priya Sahu, the actual revised risk scores subsequently obtained by them was 330 and not above 330.  The same is material since they were both thereafter categorized as ‘High Risk’ instead of ‘Medium Risk’ and were sold products not suitable to their risk profile.  As has been detailed at paragraph 11.6, where the Noticees had carried out a revision of the risk profile of their clients, the supporting documents evidencing the reasons for the change in risk profile and acceptance/ acknowledgment by the concerned clients of the revised risk scores, were also not provided by them, to SEBI.      

11.39 While conducting risk profiling and suitability assessment, the Noticees’ representatives i.e. Risk Profiling Team and Sales Department employees, seek response for each question in the RPF over the telephone, from the concerned clients. The RPF questionnaire included the following 3 queries for ascertaining the risk appetite of clients:

i. Would you invest where a small return is earned associated with small risk instead of a high?

ii. When market is not performing well would you like to invest in riskier investment instead of less risky investment to earn high return?

iii. High risk is associated with high return, Medium risk is associated with medium returns and low risk is associated with low returns? What risk can you bear (not prefer)?

11.40 Regulation 16(b)(iii) of the Investment Adviser Regulations, 2013 states that the Investment Adviser must have a process for assessing the risk a client is willing and able to take, including appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers. It is noted that the Noticees had assigned a total weightage of 24% to the above mentioned 3 queries of the RPF   Further, with the regard to the risk profiling query mentioned at paragraph 11.39.iii. above, the same appears a misleading question.  The expression ‘High risk is associated with high return…’ would in the mind of any average person create the impression that high return can be achieved only through high risk.  This however, does not indicate the fact that high risk products/ services involve equally high chances of losses.  Accordingly, if the Noticees had made their clients aware of the aforementioned, they would have been better placed to understand the perils associated with investment in a high risk product.

11.41 In the SCN, the Noticees were alleged to have failed to communicate the risk profiles to their clients. In this context, the Noticees had submitted that risk profiles were communicated to their clients via ‘Welcome Mail’ and had also attached screen shots of such communications vide their reply.  From a perusal of Annexure 3 of the Noticees’ reply, it is observed that only the ‘Welcome Mails’ of their clients, viz. Angad Chopra, Raghvendra Uppur, Virender Khatri and Rasananda Nayak (without their risk profiles) were submitted to SEBI.  It is also noted that the ‘Welcome Mails’ for the aforementioned clients were sent subsequently to the date of allotment of service contrary to the Noticees’ claims that ‘Welcome Mails’ were sent to clients while onboarding them.  I therefore, am not inclined to accept the Noticees’ submissions.  Further, where the risk profiles were communicated (including of the aforementioned 4 clients), it is noted that in such cases, the services were allotted to the clients prior to their risk profiling as under:

11.42 In the present matter, it is evident that the Investment Adviser has exhibited a cavalier approach towards risk profiling of their clients thereby completely abandoning proper due diligence and care that a person acting in a fiduciary capacity is duty bound to ensure. I accordingly find that the Investment Adviser has violated Regulation 15(1) of the Investment Adviser Regulations, 2013.  I find from the facts brought out above that the Investment Adviser has failed to carry out their obligations and responsibilities cast upon them and failed to adhere to any of the stipulations in the Code of Conduct.  I also find that the Noticees had violated clauses 1, 2, 4, 5 and 8 of Code of Conduct as specified under Third Schedule read with regulation 15(9) of the Investment Adviser Regulations, 2013.

11.43 I also find that I also find that by assigning inappropriate weights to certain answers and by assigning wrong risk category to their clients, the Noticees were able to incorrectly categorize their clients under the ‘High Risk’ category to sell products/ services inappropriate to their risk profile. In my considered view, the deceptive devices employed by the Noticees are covered within the definition of ‘fraud’ under Regulation 2(1)(c) of the PFUTP Regulations, 2003 and therefore, amounted to a violation of the provisions of Sections 12A(a), (b) and (c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003.  

I. Sale of multiple services and collection of unreasonably high advisory fees from their clients in violation of Regulations 15(1), 17(a), (b), (c), (d) and (e) of the Investment Adviser Regulations, 2013 and Clauses 1, 2 and 6 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

11.44 The Noticees allegedly failed in their responsibility to act in fiduciary capacity to their clients by dealing unfairly with them through sale of multiple products /services with the sole purpose of collecting unreasonably high fees from them. The aforementioned was in violation of Regulation 15(9) and Clauses 1, 2, 3 and 8 of the Code of Conduct specified in Schedule III of the Investment Adviser Regulations, 2013.

11.45 In their reply, Noticees 1 and 2 submitted as under:

a. The Noticee did not charge any unreasonable fee but rather, only offered his services to the clients. The clients were made aware well in advance regarding the service subscription charges.  No hidden service fee has been charged by the Noticee.  Further, there was nothing wrong in taking an advance payment for services as the clients get a discount where they opt for a service in advance.  Further, the clients had paid the fees on their own will and were not forced into doing so by the Noticee.

b. In the case of client, Deepak Kumar, he had paid a total amount of Rs. 6,59,000 for a service of HNI Equity Combo for the period from January 3, 2019 to December 2, 2019 (11 months) whereas yearly charges were Rs. 7,20,000. Hence, the Noticee did not charge him any exorbitant and disproportionate fee.  Further, prior to 2021, there was no limit or restriction on the quantum of fees chargeable from the clients.  The same became applicable only from April 1, 2021.  Therefore, the Noticee did not violate Regulations 15(1), 17(a), (b), (c), (d) and (e) of the Investment Adviser Regulations, 2013.

11.46 Medium Risk category clients being sold high risk services.

i. The risk based classification of the products/ services offered by the Noticees and which are tabulated below, revealed that out of a total of 23 products, 21 such products were meant for ‘High Risk’ clients while only 2 products were for ‘Medium Risk’ clients:

ii. On a sample analysis of the services/ products offered to clients, it was observed that the Noticees had indeed sold ‘High Risk’ services to clients with ‘Medium Risk’, some of which are detailed below:

11.47 Sale of multiple services to clients and collection of unreasonably high advisory fees from them.

i. Selling Multiple Services to the Clients: From the material available on record, it is observed that the Noticees had sold multiple services/ products to their clients as under:

A. Client: Rakesh Kumar Kushwaha

B. Virender Khatri

C. Client: Vinay Kumar Choudhary

ii. From Tables X, XI and XII, it is observed that the Noticees had sold multiple products/ services to their clients and further, new products/ services were sold to such clients even when the earlier products/ services were not yet fully served/ completed. In some cases, the Noticees had also sold products/ services in 2019 when the commencement date of service was 13 months thereafter.

11.48 Instances where Unreasonably high fees have been charged:

i. The Noticees were also found to have charged arbitrary and unreasonably high fees from their clients as under:

A. Client: Asit Baran Das 

ii. From the above table, I note that the client was sold 23 services within a period of around three months. Further, during the period June 27, 2019 to August 31, 2019, the product ‘Premium Option’ was sold to the client 19 times. I note that the said service was sold again and again even before the completion of the duration of the previous services. Products were sold in which is the services were supposed to commence after 1 year from the date of the invoice and payment. For example, product ‘Premium Option’ was sold on August 31, 2019, the service period of which would have started on September 8, 2020 i.e. more than 1 year from the date of sale of the product.

B. Client: Sai Narasimha Reddy Eda

iii. The fees charged for the service namely, Premium Equity Cash as per the information provided by the Noticees is as under:

iv. From Table XV, I note that for Premium Equity Cash service, the weekly fees chargeable is Rs. 6,000. However, from Table XIV, Noticees has charged fees of Rs. 31,172 for 8 days and charged fees of Rs. 21,600 for 20 days. I note that that disproportionate amount of fees has been charged by the Noticees from the client.

C. Client: Mr. Deepak Kumar

(i) The fees charged for the service HNI Equity Combo as per the information provided by the Noticees is as under:

(ii) I note from the table above that the service fees for 6 months is Rs. 3,82,500. However, from Table XVI, it is noted that for 5 months, the fees charged from the client is Rs. 5,00,000.  Thus, I note that the fees charged by Noticees was exorbitant, disproportionate and was not in line with the internal fee structure of Noticees.

(iii) I note that the amount of advisory fees charged to the clients was more than the proposed amount of investment by the clients. Some of the clients who had been charged more advisory fees than the proposed amount of investment is tabulated as under:

(iv) From the above table, I note that the advisory fees were more that the proposed investment amount of the clients as per their risk profile questionnaire. I note that if advisory fees itself is more than the proposed investment amount, then the client would not earn any returns on his investment.

11.49 It is noted that these acts of the Noticees were in complete disregard to the responsibility entrusted on them under the provisions of the Investment Adviser Regulations, 2013 i.e. to act in fiduciary capacity and in the best interest of their clients. I also observe that the Noticees has not sold products to clients as per their risk category and tolerance level.  Even though risk category of the client was ‘Medium Risk’, product from ‘High Risk’ categories were sold to clients.  It is observed that Noticees had not considered clients’ experience and knowledge while selecting products for them.  Further, I observe that the advisory fees charged was much higher than the proposed investment amount and therefore, the clients’ investment objectives had been impaired.  By paying such high advisory fees, clients may not be able to generate any profit or accomplish their financial objectives.  Further, it is also noted that the Noticees had not done ‘Suitability’ as mentioned in Regulation 17 of the Investment Adviser Regulations, 2013 and had charged unreasonable fees from its clients.

11.50 I am also not inclined to accept the contention of the Noticees that the clients were not misguided or had themselves disclosed wrong information to the Noticees since from the preceding paragraphs, it is clearly evident that certain clients were incorrectly categorized by the Noticees under the ‘High Risk’ category instead of ‘Medium Risk’ category and were thereafter, sold products/ services under the ‘High Risk’

11.51 The Noticees have contended that the limit on fees charged to clients was applicable only from April 1, 2021. I note that a broad guideline to ensure reasonableness in charging fees was already provided in Clause 6 of the Code of Conduct for Investment Advisers under the Investment Adviser Regulations, 2013.  It has been clearly demonstrated that the Noticees had not charged reasonable fees from their clients.  Hence, I am not inclined to accept the submission of the Noticees.

11.52 The Noticees had submitted that the clients have paid fees of their own will and consent and were neither forced nor deceived. Further, the Noticees have also contended that the fees charged to client namely, Deepak Kumar was not unreasonable.  Further, with regard to Deepak Kumar, I find that fees of Rs. 6.59 Lakh had been received from the Client whereas the gross annual income of the client was Rs. 1 to 5 Lakh as per risk profile questionnaire.  It is a matter of fact that no investor will pay higher amount of fee than their investment or annual income.  The Noticees had knowingly charged a fees which was higher than the annual income of the clients [see paragraph 11.48(iii)].  The Noticees had therefore not acted in their fiduciary capacity as required under the Investment Adviser Regulations, 2013.

11.53 Regulation 17 of the Investment Adviser Regulations, 2013 stipulates that the Investment Adviser should ensure that all investments on which investment advice is provided, appropriate to the risk profile of the client and there has to be a documented process for selecting investments based on client’s investment objectives and financial situation. So, there is a clear onus on the Investment Adviser to reasonably satisfy itself of the efficacy of his investment advice as regards the client, keeping in mind the factors stated above. 

Accordingly, I find that Noticees had violated Regulation 17(a), (b), (c), (d) and (e) of the Investment Adviser Regulations, 2013.

11.54 The Noticees, by giving investment advice to clients, which was not suitable for them had not acted in the best interests of the client, and had put their own interest of earning more fees at the fore, thereby breaching the fundamental duty of a fiduciary. I accordingly find that the Noticees had violated Regulation 15(1) of the Investment Adviser Regulations, 2013 and Clauses 1, 2 and 6 of the Code of Conduct as specified under Third Schedule read with Regulation 15(9) of the Investment Adviser Regulations, 2013.

J. Failure to make adequate disclosures to their clients regarding its association with other intermediaries, investing activities and trading, sharing of confidential information of their clients, etc. in violation of Regulations 18(1), (4) and (6) and Clauses 1, 2, 5 and 7 of the Code of Conduct specified under the Third Schedule read with Regulation 15(9) of the aforementioned Regulations.

11.55 The Noticees allegedly did not disclose their association with other intermediaries, its trading activities and performance reports of their advisory products to their clients in violation of Regulations 18(1), (4) and (6) of the Investment Adviser Regulations, 2013 and Clauses 1, 2, 5 and 7 of Code of Conduct as specified under Third Schedule read with Regulation 15(9) of the said Regulations.

11.56 In their reply, Noticees 1 and 2 submitted as under:

a. The Noticees have always disclosed all the relevant information to their clients through e-mail and also through its website.

b. The data which was found by the SEBI of another Investment adviser was brought by an employee who was previously working with the other investment adviser. The Noticee was not having any knowledge regarding the said Data.

11.57 From the material on record, it is noted that during the Inspection, KYC documents and RPFs/ records/ data of 403 clients of another Investment Adviser was found in the Noticees’ computers/ systems. However, I am inclined to accept the Noticees’ contention that they had no knowledge about the same as no other fact other than the discovery of said records, has been brought on record in the instant proceedings. 

11.58 However, as regards the allegation that the Noticees had failed to disclose all relevant information regarding their holdings in the securities market, commodity trading and investment activities, I find that vide a letter dated March 4, 2020, Noticee 2 had informed SEBI that: “I, Vicky Kamariya has done commodity trading and invested in mutual funds through the trading account and demat account in ICICI Direct and Zerodha … The above said trading and investing activities has been carried out by Vicky Kamariya after taking investment adviser license from SEBI. Further, with respect to the activity, no disclosures were made to the clients. …”  It is also pertinent to note that in the compliance audit report for the period 2018–19, the Auditor had opined that: “all material disclosure is not informed to the client, viz. demat account of proprietor.”  I therefore, find that the Noticees had failed to disclose all relevant information regarding their holdings in the securities market, commodity trading and investment activities to their clients.  

11.59 Further, vide the above mentioned letter, Noticee 2 also admitted to having failed to upload on the Noticees’ website, performance track sheets of investment advisory products offered to clients. I therefore, find that the Noticees had also failed to disclose material information about their business, to their clients.  

11.60 Regulation 18(1) of the Investment Adviser Regulations, 2013 mandates that an Investment Adviser shall all material information regarding itself including its business, affiliation to a prospective client. Further, Regulation 18(4) and (6) of the said Regulations mandated that an Investment Adviser shall disclose its holding position in securities and track record to its clients respectively.  In the instant proceedings, I find that the Noticees had not disclosed their affiliation, holding position in securities market and performance track record to their clients.  In terms of Clauses 1, 2, 4 and 7 of the Code of Conduct under the said Regulations, an Investment Adviser, shall act honestly and disclose all relevant and material information to its clients.  Accordingly, I conclude that the Noticees had violated Regulations 18(1), (4) and (6) of the Investment Adviser Regulations, 2013 and Clauses 1, 2, 5 and 7 of Code of Conduct as specified under Third Schedule read with Regulation 15(9) of the said Regulations.

K. Failure to ensure compliance with Anti–Money Laundering Policy on account of not having a ‘Principal Officer’ and failure to inform the FIU regarding the said fact in violation of Circular dated January 18, 2006.

11.61 The Noticees allegedly failed to appoint a ‘Principal Officer’ and submit details regarding such officer to FIU in violation of Circular dated January 18, 2006.

11.62 In their reply, the Noticees submitted as under:

a. The Noticee had in place anti money laundering policy but had failed to informed the FIU regarding its Principal Officer. Further, the Noticee had never come across any such suspicious transactions wherein the requirement for reporting such transactions had arisen.

b. As per the Circular dated January 18, 2006, SEBI had inter alia advised all registered intermediaries to ensure that a proper policy framework on anti– money laundering measures is put into place within one month from the date of the said Circular. The intermediaries were further advised to designate an officer as ‘Principal Officer’ and intimate the details thereof to the FIU on an immediate basis.  The ‘Principal Officer’ is inter alia responsible for timely submission of cash transaction report/ suspicious transaction report (along with recording his reasons for treating any transaction as suspicious) concerning the registered intermediary to the FIU.  In the Noticees’ case, it is noted that the ‘Principal Officer’ stated to have been appointed i.e. Rahul Sisodiya, had absconded since January 24, 2018.  The Noticees had also not produce any documents to indicate that a ‘Principal Officer’ post the aforesaid period.  I note that the Noticees had failed to appoint a ‘Principal Officer’ and further, had admittedly failed to inform the FIU of the aforementioned fact.  Accordingly, I find that the Noticees had violated the provisions of the Circular dated January 18, 2006.    

CONCLUSION

11.64 From the preceding paragraphs, the following is noted:

a. The Noticees’ website www.moneymarketmanthan.com contained promise of assured profit/ unrealistic returns to prospective clients. Further, the testimonials on the Noticees’ website displayed claims of fictitious/ non– existent clients stating that with the help of the services provided by Noticees, they had made huge profits and were very much satisfied with the accuracy of investment advice given by Noticees. The Noticees’ employees had adopted fake names and designations and made false assurances to lure clients to subscribe to the products/ services offered by them.  The Noticees had therefore, indulged in mis–representation and mis–selling of products/ services in order to induce clients to avail of investment advisory services from them.    

b. The Noticees had carried out risk profiling of their clients in a very casual and non–professional manner. The risk profiling questionnaire used by the Noticees had also assigned inappropriate weightage to certain answers for queries contained therein.  Incorrect risk scores arrived at by the Noticees had subsequently resulted in wrongful risk categories being assigned to their clients.  Additionally, risk profiling results were not communicated to the Noticees’ clients. 

c. As a result, the clients were sold multiple products/ services without any evidence of some assessment regarding their suitability being made by the Noticees in consultation with said clients. The Noticees had also charged unreasonably high advisory fees from clients.

d. The Noticees had failed to extend full co–operation to SEBI during the Inspection including through non–submission of complete information/ documents/ records.

e. The Noticees had failed to redress investor grievances in a timely manner.

f. The Noticees had also failed to appoint a ‘Principal Officer’ in violation of the Circular dated January 18, 2006.

11.65 The abovementioned acts and omissions by the Noticees had amounted to a violation of the provisions of the SEBI Act, PFUTP Regulations, 2003, Investment Adviser Regulations, 2013 and SEBI Circulars, as detailed above.

11.66 In view of the aforementioned, I find that it to be a fit case for issuing appropriate directions under Sections 11(1), 11B(1) and 11(4) of the SEBI Act, 1992 against the Noticees.

12. The SCN in this matter also calls upon the Noticees to explain as to why appropriate penalty be not imposed upon them under Sections 15C, 15EB, 15HA and 15HB of the SEBI Act, 1992 for the abovementioned violations. The relevant extracts of the said provisions are as under:

Penalty for failure to redress investors’ grievances. Section 15C of the SEBI Act. “If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing including by any means of electronic communication, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.”

Penalty for default in case of investment adviser and research analyst.

Section 15EB of the SEBI Act. “Where an investment adviser or a research analyst fails to comply with the regulations made by the Board or directions issued by the Board, such investment adviser or research analyst shall be liable to penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.”

Penalty for fraudulent and unfair trade practices. Section 15HA of SEBI Act, 1992: “Penalty for fraudulent and unfair trade practices. 15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.”

Penalty for contravention where no separate penalty has been provided.

Section 15HB of SEBI Act, 1992. “Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.”

13. I note that there were delays in the redressal of investor grievances by the Noticees, as 8 complaints were kept pending for more than 100 days (see Table II at pages 26 and 27). These delays were much above the time granted for resolution of complaints i.e. thirty (30) days.  I find that the same makes the Noticees liable for penalty under Section 15C of the SEBI Act. 

14. Similarly, I note that various lapses have been found against the Noticees, which include not furnishing complete information to SEBI during inspection, not maintaining maintain records of communication with clients pertaining to risk profiling, suitability assessment, selection of products/ services, divulging confidential information of clients, promising assured returns to their clients, mis–representation and mis–selling of products/ services by Noticees through their employees, not ensuring compliance w.r.t. qualification and certification requirements of their representatives, not redressing Investor grievances in a timely manner, improper risk profiling and not communicating the risk profiling form to clients, charging its clients service fees arbitrarily, collecting unreasonable amount of fees, not abiding by the norms of suitability, not disclosing material information about themselves to their clients and violation of the Circular dated January 18, 2006. I note that the abovementioned lapses are deviations from the principal duties and responsibilities cast upon an Investment Adviser and have resulted in violation of various provisions of Investment Adviser Regulations, 2013.  I, therefore, find that penalty under Sections 15HB (for the violations up to March 8, 2019) and 15EB (for violations after March 8, 2019) of the SEBI Act, is clearly attracted for such lapses. 

15. Further, it has also been established that the Noticees by promising assured returns, assigning wrong risk category to their clients, mis–representation and mis–selling of products/ services, had indulged in fraudulent and unfair trade practices, resulting in violation of the provisions of PFUTP Regulations, 2003, which have already been discussed above. I, therefore, find that penalty under Section 15HA of the SEBI Act is clearly attracted in this case. 

16. While deciding the quantum of monetary penalty under the abovementioned provisions of SEBI Act, factors mentioned under Section 15J of the said Act, have to be considered. The said provision reads as under:

“Factors to be taken into account while adjudging quantum of penalty. 15J. While adjudging quantum of penalty under 15-I or section 11 or section 11B, the Board or the adjudicating officer shall have due regard to the following factors, namely: —

• the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
• the amount of loss caused to an investor or group of investors as a result of the default;
• the repetitive nature of the default.

Explanation. —For the removal of doubts, it is clarified that the power to adjudge the quantum of penalty under sections 15A to 15E, clauses (b) and (c) of section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.”

17. I also note that the SCN has not brought out the quantum of profit/ gains made by the Noticees or the loss caused to the investors as a result of the defaults/ violations committed by the Noticees, though the complaints received from certain investors show that they have suffered losses due to the actions of the Noticees. Further, since lapses have occurred in multiple instances, I find that the defaults are repetitive in nature.  I have considered these factors while deciding the monetary penalties. 

18. In consideration of the above, I shall now proceed to issue appropriate directions, including the imposition of monetary penalties.

DIRECTIONS  

19. I, in exercise of powers conferred upon me under Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) of the Securities and Exchange Board of India Act, 1992 and in the interest of investors do hereby pass the following directions: –

A. The Noticees are prohibited from accessing the securities market and further restrained from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly, for a period of three (3) years from the date of this Order.

B. The Noticees are directed to resolve the complaints pending against them in the SCORES or otherwise, within a period of 30 days from the date of this Order. The Noticees shall furnish to SEBI a compliance report regarding resolution of pending complaints, duly certified by an independent Chartered Accountant, within 3 months from the date of this Order.  Such report shall be forwarded to “The Division Chief, Division of Post-Inspection Enforcement Action, Market Intermediaries Regulation and Supervision Department, SEBI Bhavan II, Plot No. C7, G Block, Bandra Kurla Complex, Bandra (East), Mumbai–400051”.

C. In case of failure of the Noticees to comply with the directions mentioned at sub–paragraph (B) above, the direction of restraint issued at sub– paragraph (A) above, shall continue to be in force till the expiry of three years from the date of compliance with the direction given at sub– paragraph (B) above, by the Noticees.

D. During the period of restraint mentioned at sub–paragraphs (A) and (C) above, the existing holdings of securities including the holdings of units of mutual funds, of the Noticees, shall remain frozen. However, the Noticees are allowed to settle the pay–in and pay–out obligations in respect of transactions, if any, executed by them before the closure of trading on the date of this Order.  The Noticees are also permitted liquidate any open positions in exchange-traded derivative contracts that they might have, within 3 months from the date of this Order, or the expiry of such contracts, whichever is earlier.

E. The Noticees are hereby imposed with, the monetary penalties, as provided hereunder: 

F. The Noticees shall remit / pay the amount of penalty mentioned in the Table under sub-para (c) above, within 45 days of receipt of this order by using the undermentioned pathway: www.sebi.gov.in/ENFORCEMENT → Orders → Orders of Chairperson/ Members    →    Click    on    PAY    NOW    or    by using the web link: https://siportal.sebi.gov.in/intermediary/AOPaymentGateway.html. The Noticees shall forward the details/confirmation of penalty so paid through e-payment to “The Division Chief, Division of Post-Inspection Enforcement Action, Market Intermediaries Regulation and Supervision Department, SEBI Bhavan II, Plot No. C7, G Block, Bandra Kurla Complex, Bandra (East) Mumbai – 400051” and also to e-mail id: [email protected] in the format given in the table below.

20. This Order is without prejudice to any other action that SEBI may initiate.

21. The above directions shall come into force with immediate effect.

Place: Mumbai                                                                                         ASHWANI BHATIA

Date: June 28, 2023                                                    WHOLE TIME MEMBER

         SECURITIES AND EXCHANGE BOARD OF INDIA