WTM/GM/IMD/08/JAN/2017. Case: In Re: Capital Via Global Research Limited and Ors. Vs. Securities and Exchange Board of India

Case NumberWTM/GM/IMD/08/JAN/2017
Party NameIn Re: Capital Via Global Research Limited and Ors. Vs
CounselFor Appellant: Naveen Sharma, Deputy General Manager, T. Venkateshwarlu, Assistant General Manager, Jayeeta Ray, Assistant General Manager and Amruta Sadguru Naik, Manager
JudgesG. Mahalingam, Whole Time Member
IssueSecurities And Exchange Board Of India Act, 1992 - Sections 11(1), 11B, 11D, 12, 12(1)
Judgement DateJanuary 20, 2017
CourtSecurities and Exchange Board of India

Order:

G. Mahalingam, Whole Time Member

Background

  1. Capital Via Global Research Limited ("Capital Via") registered as an Investment Adviser ("IA") under the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (hereinafter referred to as the "IA Regulations") with effect from April 10, 2014 for a period of five years. Capital Via has its registered office at 99, 1st Floor, Surya Complex, R.V. Road, Basavangudi, Bangalore, Karnataka and its principal place of business at 903, B-l, 9th Floor, NRK Business Park, Scheme No. 54, P-U-4, Indore-452010, Madhya Pradesh.

  2. Pursuant to complaints received against Capital Via, an inspection (hereinafter referred to as "the Inspection") was conducted by the Securities and Exchange Board of India (SEBI) on the second and third day of July, 2015 at the Indore office of Capital Via. (One such complaint inter alia, alleged that "Capital Via charged a fee of Rs. 25,00,000/- for their services rendered wherein they promised an assured return of 10%."). The inspection revealed certain violations and noncompliance''s with the provisions of the IA Regulations. SEBI vide letter dated October 15, 2015 forwarded the Inspection report to Capital Via and sought comments/explanations on the findings therein. Based on the response of Capital Via, an interim order-cum-show cause notice dated November 11, 2016 (hereinafter referred to as "the Interim order") was passed against Capital Via and its above named directors (collectively referred to as "the Notices"), wherein the following directions were issued-

    "...

    i. not to solicit or undertake any fresh advisory business with immediate effect till further directions.

    ii. to redress the grievances received against Capital Via and to comply with all the provisions of LA regulations and submit a compliance report to SEBI within three (3) months from the date of receipt of this order.

    This Order shall be treated as a show cause notice and Capital Via and its Directors viz. Mr. Kiran Ravindra Kumar Choudhary, Mr. Rohit Gadia, and Mr. Anshul Mansingka may show cause as to, why appropriate directions under the SEBI Act, 1992 and relevant SEBI Rules/Regulations including directions prohibiting them from buying, selling or otherwise dealing in securities market, either directly or indirectly, in any manner whatsoever, should not be issued against them."

    Against the aforesaid directions, Capital Via filed Appeal No. 445/2016 before the Securities Appellate Tribunal (hereinafter referred to as "SAT"). The Hon'ble SAT vide order dated January 05, 2017 (hereinafter referred to as "SAT order"), held that since hearing had been fixed on 16th January, 2017, SEBI is directed to hear the appellant on 16th January, 2017 and pass an order by 20th January, 2017 and communicate the same to the appellant on 20th January, 2017 itself.

  3. Capital Via had filed its written reply to the Interim order vide letter dated December 12, 2016 (hereinafter referred to as "Reply"), including 13 Annexures each of which have been perused in detail. Further an opportunity of personal hearing was granted to the Notices on January 16, 2017 (hereinafter referred to as "the Hearing"), when its representatives appeared and they were heard at length.

    Hearing

  4. Before getting into the issues that merit a careful adjudication, I would like to record the Notice''s oral submissions and my observations thereon wherever necessary:

    (a) The entity is one of the first entrants in the field of Investment advisers at Indore with an employee strength of over 750. Capital via has a number of qualified experts/professionals to cater to the requirements of their clients including Chartered Market Technicians (CMTs) who are experts at technical analysis of market price movements. The CMTs are skilled professionals and their salary packages are market linked. Capital Via has specialised departments to monitor marketing calls made to their clients by the staff in marketing division and they maintain distance from the risk profiling division. The average corpus per client is 30 lakh and they have a clientele of 3450 approximately. In short, the representatives submitted that it is a huge establishment and have been in the field from 2007-08 onwards.

    (b) Capital Via when asked specifically whether SEBI''s directions restraining them from soliciting any fresh business were disclosed on its website, admitted that it has not been done so far. Further, they informed that the uninformed clients who were transferring funds on-line were informed through phone calls about the regulator''s directions and the amounts were being duly refunded to those clients subsequently.

    (c) Further, during the Hearing, when pointed queries were raised about the disproportionately high fees levied by them leading to creation of unrealistic expectations of return on the part of HNI clients, the representatives submitted that the Regulations do not provide a framework for calibration of the reasonableness of the fee levied. When questioned about the refund of the advisory fee which amounted to ` 24,59,856/- to one complainant, it was submitted that the amount was towards fee collected for three years and upon receipt of the complaint, they realised that it was "not the best case" and decided to refund. Capital Via further submitted that approximately ` 34 lakh was taken from another client for 3 years and the client corpus was ` 1 crore.

    (d) During the Hearing, the representatives submitted that in general an investor/customer starts with basic products and gradually upgrades himself to the more complex ones. As regards risk profiling of the clients, Capital Via laid emphasis on its submission that its advice was based on historical chart analysis of price movements and this was suited for intra-day trading. By implication, it was indicated that intra-day trading being a less riskier approach did not require a systematic risk profiling process. Further, the representatives had no effective submissions with respect to the proof of communications sent to clients about their risk profile and other assessments and advices.

    (e) When the representatives of Capital Via were specifically asked as to why ''Investment Adviser'' is not displayed as a part of their name, they justified saying that it would not be in the interest of their brand value without elaborating how.

    (f) As far as the unsupported projections in the website are concerned, especially with respect to their activities in US and Singapore, it was submitted that these are for generating leads in the digital space and not intended to misrepresent.

    (g) On KYC compliance, the representatives explained that there were initially no circulars of KYC applicable to IAs. From SEBI''s side, it was pointed out that SEBI''s letter dated May 19, 2014 communicating the grant of Certificate of Registration contained the specific condition that they should comply with SEBI(KYC Registration Agency) Regulations, 2011, and the same was not disputed by them.

    (h) As far as the SEBI Complaints Redress System (SCORES) complaints relating to non-redressal of investor complaints are concerned, the entities stated that no pending complaints are there. Further, Capital Via highlighted certain problems that are faced regarding the SCORES platform, particularly regarding the timeline within which complaints are received and closed. Since the issue does not have any direct bearing on the allegations/charges against Capital Via, the same are not taken up for deliberation in this order.

    (i) Also during the Hearing and in the Written Submissions made pursuant to Hearing, Capital Via complained that their mails to SEBI did not elicit any response. I have perused the enclosed emails, and find that response was sent by SEBI Head Office at Mumbai. It is also pertinent that in the email sent from Capital Via to SEBI Head Office, they have sought a meeting to update SEBI regarding "corrective measures" taken internally thus further indicating and reiterating their admission that breach of regulatory provisions had, in fact, taken place. In this context, the Written Submissions also contain a statement that reads as follows:

    "That, the Capital Via had submitted its preliminary reply to the observations made by inspecting team and thereafter complied with all the obligations and responsibilities as required under Chapter III of the Regulations, 2013 and become fully compliant intermediary."

  5. Pursuant to the Hearing, Capital Via, vide an email, sent written submissions (hereinafter referred to as "the written submissions") reiterating the oral submissions made on the date of the Hearing. The said email was received on January 17, 2017 at 11.20 P.M. The submissions included 9 Annexures, all of which have been carefully perused. The relevant points arising out of the written submissions and the annexures are separately discussed under each issue. However one broad observation is noted at this stage. Capital Via has submitted Internal Audit Reports for three quarters i.e. from April, 2016 to December, 2016 conducted by one Fadnis & Gupte, Chartered Accountants, as per the scope of audit provided to them by Capital Via. The Audit reports basically certify that certain compliances are in order. The Audit reports are at best cursory and do not provide details of the steps taken by Capital Via to ensure compliance with IA Regulations. Hence, I am unable to consider these reports as valid proof of due compliance of the IA Regulations.

    Scope and Object of IA Regulations:

  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...

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