Date of Decision:04.01.2022
Appeal No.765 of 2021
Ms. Suhanika Chourey
Partner Wealth Management Research
Ward No.15, Makan No.11,
Near Old Janta School,
Malviyaganj, Itarsi, (M.P.) -461111. …Appellant
Securities and Exchange Board of India
SEBI Bhavan, BKC, Plot No.C4-A,
‘G’ Block, Bandra Kurla Complex,
Bandra (East), Mumbai – 400 051,
Mr. C.S. Abhishek Mishra, Practicing Company Secretary for the Appellant.
Mr. Abhishek Khare, Advocate with Mr. Sharvil Kala, Advocate i/b. Khare Legal for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer Justice M.T. Joshi, Judicial Member
Per: Justice Tarun Agarwala, Presiding Officer (Oral)
1. The present appeal has been filed against the order dated 31st August, 2021 imposing a penalty of Rs.7 lakhs under Section 15HA and Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) for violation of Section 12(1) of the SEBI Act read with Regulation 3(1) of SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as ‘IA Regulations’) and also the provisions of Regulations 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003) (hereinafter referred to as ‘PFUTP Regulations’) read with Sections 12A of the SEBI Act.
2. The facts leading to the filing of the present appeal is, that a partnership firm was created by the appellant and two others for carrying out investment advisory activities. The business started on 28th January, 2016 and in four months they had about 100 clients and generated about Rs.16 lakhs. A complaint dated 29th February, 2016 was lodged against the appellants for carrying out unauthorised investment advisory activities. This led to an investigation wherein it was found that the appellants were carrying out investment advisory activities without getting themselves registered under the SEBI Act.
3. Accordingly, a show cause notice was issued to show cause as to why appropriate penalty should not be imposed upon them.
4. The appellant submitted a reply admitting that they had committed a mistake of running a business of investment advisory without obtaining registration from SEBI due to their non-awareness and limited knowledge of the SEBI laws. However, upon coming to know that a registration was required they immediately closed their advisory business and closed their bank accounts and dissolved the partnership agreement. Further, the appellants refunded the monies taken from their clients. It was urged that the business which was started was closed within four months.
5. The Adjudicating Officer after considering the reply and finding that the business was only carried out for four months and monies were refunded to the clients held that the appellant had violated Section 12(1) of the SEBI Act read with Regulation 3(1) of the IA Regulations, 2013 for not obtaining registration for carrying out advisory business. The AO, however, also found the appellants guilty of violating Regulation 3 of the PFUTP Regulations read with Section 12A of the SEBI Act and, accordingly, imposed a penalty of Rs.7 lakhs.
6. We have heard Mr. Abhishek Mishra, Practicing Company Secretary for the appellant and Mr. Abhishek Khare, Advocate assisted by Mr. Sharvil Kala, Advocate for the respondent.
7. Having heard the learned counsel for the parties, we find that the Adjudicating Officer has committed a manifest error in imposing penalty for violation under Regulation 3 of the PFUTP Regulations read with Section 12A of the SEBI Act. We have gone through the entire order and we do not find any iota of any evidence which would show that the business carried out by the appellant and its firm was a fraudulent activity or that they played a fraud upon its clients. The mere fact that they started an advisory business without obtaining a registration does not mean that a fraudulent activity was being carried out. We also find that upon getting to know that a registration was required the appellants stopped their business immediately and dissolved the partnership deed. Thus, we are of the firm opinion that in the absence of any evidence the charge of fraudulent activity cannot be imposed under Regulation 3 of the PFUPT read with Section 12A of the SEBI Act. Consequently, no penalty under Section 15HA could be imposed. Section 15HA provides that penalty could be imposed were a person indulges in fraudulent and unfair trade practices relating to securities. In the instant case, there is no fraudulent or unfair trade practice committed by the appellant. Consequently, no penalty under Section 15HA could be imposed.
8. However, admittedly registration was not taken by the appellant and, therefore, they have violated Regulation 3(1) of the IA Regulations read with Section 12(1) of the SEBI Act for which a penalty under Section 15HB could be imposed. Section 15HB requires that where a person fails to comply with any provisions of the Act, Rules or Regulations then he would be liable for penalty which shall not be less than Rs.1 lakh and which may extend to Rs.1 crore. In the instant case, the business ran for four months. There is a finding that the monies taken from the clients were returned. Consequently, in our opinion, a minimum penalty of Rs.1 lakh under Section 15HB would be just and appropriate.
9. For the reasons stated aforesaid, the appeal is allowed in part on the admission stage itself without calling for a reply. The penalty of Rs.7 lakhs is reduced to Rs.1 lakh which shall be paid by the appellant within four weeks from today.
10. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer
Justice M.T. Joshi Judicial Member