M/s Star India Market Research vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

This appeal has been preferred to challenge the order of the Adjudicating Officer (‘AO’ for short) of Securities and Exchange Board of

India (‘SEBI’ for short) dated August 7, 2019 whereby a penalty of Rs. 40 lakh has been imposed under Section 15HB of the SEBI Act, 1992.

It is held in the impugned order that the appellant has violated Regulation 15, 16 and 17 along with Schedule III of the SEBI (Investment Advisors)

Regulations, 2013.

Appellant is a SEBI registered Investment Advisor with effect from October 12, 2015. SEBI officials conducted an inspection for the period from

April 1, 2016 to November 6, 2017 during 6 - 7 November, 2017. On the basis of the findings during this inspection SEBI initiated adjudication

proceedings and the AO was appointed on January 15, 2019. Thereafter a show cause notice was issued to the appellant on February 25, 2019

directing to show cause as to why an enquiry should not be held against the appellant and penalty imposed for various alleged violations stated therein.

The main alleged violations against the appellant are:-

(i) Offering products without considering the risk profile of the clients.

(ii) Offering high net-worth individual (HNIs) services to unsuitable clients.

(iii) Receiving payments in advance for future services.

(iv) Charging high and unreasonable fee from clients.

After considering the reply of the appellant dated March 9, 2019 and after providing an opportunity for personal hearing etc. the impugned order

was passed on August 7, 2019. It is held in the impugned order that the appellant has committed several violations as alleged in the show cause notice.

It is observed that high risk products were offered to young investors in the age bracket of 18 â€" 20 years and to various senior citizens above 80

years. Similarly, services which are meant for HNI have been offered to young investors in the age group of 19 â€" 21 years. Further, there are about

40 instances where the appellant had charged the clients twice the charge allowed for such services. In as many as 62 instances payments were

collected for services to be rendered in future.

In its reply the appellant submitted that it has offered high risk services to only a few clients; the age bracket of 19 â€" 21 given in the show cause

notice was not correct; age alone is not a criteria for assessing the risk bearing capacity of investors; HNI services were given to young investors

because of their capacity to finance as well as to take risk and so on.

Shri Pulkit Mehta, Authorized Representative appearing for the appellant fairly submits that though all the charges are not correct some violations

have happened from the side of the appellant which were unintentional. Moreover, as stated in its reply a completely watertight classification of risk

capacity and age etc cannot be justified. In any case for the minor, technical violations that have occurred unintentionally the penalty of Rs. 40 lakh

imposed under Section 15HB is too high and excessive particularly in the context that the appellant had a net profit of only about 31 lakh in 2015-16

and incurred a loss in the previous year and has a net worth of about Rs. 21 lakh. Therefore, factors under Section 15J of the SEBI Act are not

considered by the AO while imposing such a heavy penalty.

We have also heard the learned Counsel Ms. Anubha Rastogi appearing for respondent SEBI who contended that the violations committed by the

appellant are many and serious and hence the penalty imposed is just and fair.

We find merit in the submissions of the Authorized Representative of the appellant that the penalty imposed is too harsh and disproportionate. The

appellant is a small investment advisor with a profit of about Rs. 30 lakh in a year and with a small amount of net worth. Though it is an admitted fact

that the appellant has committed certain violations there is also some merit in the submissions that in every case the age profile and risk taking

capacity can be tightly compartmentalized. In any case the penalty which can be imposed under Section 15HB of the SEBI Act “shall not be less

than Rs. 1 lakh but which may extend to Rs. 1 croreâ€. Given this provision and taking into consideration the nature, value and number of the

violations committed by the appellant as well as its financial capability penalty of Rs. 40 lakh imposed is disproportionate and harsh.

In view of the aforesaid, the appeal is partly allowed. The impugned order is affirmed insofar as violation of the provisions of the Regulations are

concerned and the Code of Conduct. The penalty, however, is reduced from Rs. 40 lakh to Rs. 20 lakh. Appellant is directed to pay the said amount

of penalty within four weeks from today. No orders on costs.