SEBI Order under the Investment Advisers Regulations

A whole-time
member of the Securities and Exchange Board of India passed an order
involving CapitalVia Global Research Limited under the SEBI (Investment
Advisers) Regulations 2013 (the “IA Regulations”). The case arose out of an
inspection carried out by SEBI on CapitalVia, which resulted in an interim
order being passed by SEBI on November 11, 2016. Since then, SEBI has held
hearings and received representations from CapitalVia, based on which it passed
the present order on January 20, 2017.
The case involved
several alleged violations by CapitalVia of provisions of the IA Regulations.
Before considering the individual allegations, the SEBI order does a helpful
job of laying out the scope and object of the IA Regulations as follows:
6. It is relevant to appreciate the role of an Investment Adviser as
contemplated under the IA Regulations in order to actually ascertain and assess
the scope of breaches and its impact on the securities market on a holistic
basis. The object of the IA Regulations, inter alia, was to lay down a framework
for independent financial advisers which was absent till 2013 and to address
the conflict of interest arising due to the dual role (advisory and sale)
played by the distributors of financial products. Investment Advisors perform a
pivotal role in the securities market of securing investor confidence in the
integrity of the markets. This stems directly from the quality of advice
provided to the investors which has to be honest and unbiased without being, in
any way, swayed by short term profit motives. In addition to the statutory
mandate under section 12 of the SEBI Act, 1992 to get registered, the
regulation of investment advisory activity is necessary to avoid unscrupulous
advisory business wherein investors could be misguided towards making
investments in the securities market without providing them with an honest
assessment of risks involved. There is thus a need to ensure discipline and
transparency in this field of intermediation business in the securities market
to protect the interest of the investors.
7. Investment advisers are understood to be persons who, for
consideration, render advice relating to investment in securities or a
portfolio of securities. Advice given as incidental to other primary activity
are exempt from the purview of registered investment advisers. By definition
therefore, the primary role of an investment adviser is to render, in good
faith, advice that is suitable for investors. Consequently, the role of an
investment adviser revolves around how accurately the risk assessment/profiling
of a client is done , and how suitable is the advice rendered to the clients’
risk profile and more importantly, the continuous channel of communication that
an IA establishes with the clients to strengthen investor confidence.
Prospective clients who approach investment advisers do so because their
ability to evaluate the complexities of the securities market may be
inadequate, or because confidence in the investment will be enhanced by the
advice of an informed professional. In any case, the high level of trust that
the client/investor reposes in the adviser is the fulcrum on which the entire
edifice of IA profession is predicated upon. The framework of the SEBI
(Investment Advisers) Regulations, 2013 (hereinafter referred to as “IA
Regulations”) is structured towards protecting this trust, in addition to
ensuring integrity of the securities market. The scheme of the IA Regulations
makes it clear that besides laying down the registration requirements, and
capital adequacy requirement, it elaborates on the general obligations and
responsibilities in detail and step-wise risk profiling processes and how the
advice should be methodically arrived at with respect to each client taking
into consideration the clients’ financials and investment objectives etc. The
assessment of suitability of a product to a particular client, the necessity
for all disclosures to be in place about the investment adviser itself and the
pecuniary connections with the products as well as its affiliations to other
entities associated with the securities market are all aimed at ruling out a
potential conflict of interest. The success of the regulatory framework lies in
the implementation of the same by the registered Investment advisers imbibing
the spirit of the Regulations coupled with timely inspections conducted by the
regulator.
Based on these
objectives, SEBI considered the individual violations alleged in the case of
CapitalVia. It found several violations of the IA Regulations (which are
detailed in the order), including the following:

– The
products of CapitalVia were not simple enough for the investors to understand
their inherent risks; that products with short term horizon, which were more
appropriate and suitable for only high risk investors, were sold to low/moderate
risk investors, thereby diluting the norm of suitability;


The responsibilities of an investment adviser highlight the fiduciary
relationship it has with its client, and that it is expected to function in the
best interests of the client and not shrug off the responsibility for its
advice;


There were false and inadequate disclosures regarding SEBI’s interim order, due
to which CapitalVia continued to solicit new business rather than to dissuade
fresh advisory business;


CapitalVia failed to maintain records, including KYC details;


It charged exorbitant fees to the clients, which violated the principle that
investment advisers are to act with due care due to its fiduciary relationship
with their clients.

Finally, before passing orders against CapitalVia,
including requiring it not to undertake fresh advisory business for another
period of four months, and not to accept funds from clients for such period,
SEBI again highlighted the importance of the role of investment advisers on the
broader markets:

10. Registration of investment
advisers is a statutory mandate flowing from section 12 (1) of the SEBI Act,
1992. Regulation of Investment advisory activity was considered necessary to
avoid unscrupulous advisory business wherein investors could be misguided
towards making investments in the securities market. There was a need to ensure
discipline in this field of intermediation business in the securities market.
Quality of advice rendered to investors has an impact on investors confidence
in the integrity of the markets. Consequently, it is statutorily and ethically
important to view seriously any infraction on the part of investment advisers.
This is all the more so in the case of a large organization like CapitalVia
which by its own statement is considered to be a pioneer in the field of
investment advisory business. The more significant an organization, the bigger
the ripple effect its actions or omissions have on the confidence in the
system. …

In
relation to oversight on the capital markets, the IA Regulations are relatively
new, and SEBI’s orders such as the present one will pave the way for a deeper
understanding of the regulatory regime.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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