The article is written by Susmita Kundu. The present article provides a detailed analysis of the Order under the case of Ravindra Bharti Education Institute Private Limited. It elaborates on the factual background, facts, issues, judgement of the Court, opinions of the judges and the laws applied in the said case.
SECURITIES AND EXCHANGE BOARD OF INDIA
EX-PARTE INTERIM ORDER CUM SHOW CAUSE NOTICE
[Under Sections 11(1), Il(4A), IIB(I), 11B(2) and IID of the Securities And Exchange Board of India Act, 1992 read with the regulation of the Securities And Exchange Board Of India (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003]
BACKGROUND:
An inspection conducted by SEBI(Securities and Exchange Board of India) resulting in the present proceeding, regarding the activities of Mr. Balu Motiram Bharati, an Authorised Person of ABC Limited[1], led to an independent examination of Ravindra Bharti Education Institute Private Limited (RBEIPL). The examination period was from March 10, 2017, to September 30, 2023, to determine if RBEIPL was providing investment advisory services without the necessary registration from SEBI as required by the SEBI Act[2] and IA Regulations[3]. The focus was on whether RBEIPL’s activities violated any SEBI rules, necessitating urgent action.
On March 22, 2018, SEBI issued Circular No. SEBI/HO/MIRSD/DOP1/CIR/P/2018/54, also known as the “2018 Circular”. This circular states that Stock Brokers must keep records of how each client places their trade orders, which can include telephone recordings, written orders through emails, personal visits, etc. This requirement also applies to the Authorised Persons of stock brokers. During the inspection of Mr. Balu Motiram, it was discovered that the representatives were approaching clients with specific recommendations to buy or sell securities, instead of waiting for clients to approach them. SEBI is further examining these facts to determine if an ex-parte interim order is necessary.
NOTICEE Nos.:
Ravindra Bharti Education Institute Private Limited– Noticee No. 1
Ravindra Balu Bharti –Noticee No. 2
Shubhangi Ravindra Bharti –Noticee No. 3
Rahul Ananta Gosavi –Noticee No. 4
Dhanashri Chandrakant Giri –Noticee No. 5
FACTS:
Both Mr. Balu Motiram, the Authorised Person, and RBEIPL operated from the same location[4]. According to the information provided by the National Stock Exchange of India Limited (NSE), Mr. Rahul Ananta Gosavi[5] and Mr. Bodhe Harshad Laxman[6] were registered as Dealers, while Mr. Giri Vishwas Nana[7] was registered as an Approved Person of Mr. Balu Motiram. However, it has come to light that all three individuals were also employed by RBEIPL.
After observing irregularities during an examination, SEBI contacted certain clients of the Authorized Person in October 2023. These clients have confirmed that they had separate agreements with RBEIPL, where RBEIPL charged them a fee for providing investment advisory services. It has also been found that employees of RBEIPL would reach out to the clients and instruct them to execute specific trades. Subsequently, the office of the Authorized Person would call the client to confirm the trade, in order to show that the trades were executed based on the clients instructions and in compliance with the SEBI 2018 Circular.
Upon reviewing RBEIPL’s website, it was discovered that they offer stock market trading courses and investment advisory services. The trading course fees range from INR 28,800 to INR 47,200, while the advisory service fees are typically over INR 50,000. A total of INR 101,33,53,118.58 was credited to RBEIPL’s bank account between January 2018 and September 2023. After excluding trading course fees and unrelated credits, a total of 682 credit entries amounting to INR 9,41,97,759.42 were identified as potentially received for investment advisory services during this period.
SEBI’s email on December 01, 2023, instructed RBEIPL to share details about its investment advisory business, including client lists, agreements, emails, and fees. On December 18, 2023, RBEIPL shared details of 235 active clients, 55 closed clients, and 17 refunded clients, totalling 290 unique clients after removing duplicates. Some agreements and payment receipts were provided, but the complete set of advisory service emails was still missing. Despite reminders, complete information was not provided, leading to doubts about the completeness of the client list shared by RBEIPL.
Findings:
Upon reviewing RBEIPL’s documents, including the agreement, payment receipts, and more, it is clear that they operate as both a training institute and an investment advisory service. The Wealth Management agreements they have with some clients clearly indicate their role as an investment adviser. The payment receipts show that RBEIPL has charged significant fees from clients, issuing multiple invoices on the same day. For example, on September 03, 2021, they raised two invoices for “Wealth Management Service” from a single client, totalling INR 76,700 (including GST) and INR 1,07,380 (including GST). The fact that both invoices pertain to “Wealth Management” services suggests that clients are being offered multiple advisory packages in a single day.
It has been observed that RBEIPL not only provides investment advice on specific securities but also specifies the purchase price and quantities of securities to be bought in their clients’ accounts. Additionally, RBEIPL has complete control over the buying and selling transactions of their clients to ensure they are executed according to their recommendations. Based on the examination and analysis of the gathered facts, it can be concluded that the activities of RBEIPL can be considered as falling under the category of “investment adviser”[8].
LEGAL ISSUES:
After examining the initial evidence regarding the facts, the following issues arise:
Whether the actions and omissions of RBEIPL, regarding the provision of investment advisory services without obtaining registration from SEBI, violate the SEBI Act and its regulations, means –
- Whether there is a violation of subsection (1) of section 12 of the SEBI Act, 1992[9], and subsection (1) of Regulation 3 of the IA Regulations[10].
- Whether there is a violation of clauses (a), (b), and (c) of section 12A of the SEBI Act[11], 1992, in conjunction with subsections (a), (b), (c), and (d) of regulation 3[12], subsection (1) of regulation 4, and clauses (k), (o), and (s) of subsection (2) of regulation 4[13] of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015(PFIJTP).
- Whether there is any violation by Noticee nos. 2, 3, 4 and 5.
ANALYSIS OF LEGAL ISSUES:
Issue 1 –
It is important to highlight that the main purpose of section 12(1) of the SEBI Act, 1992 and regulation 3(1) of the IA Regulations is to prevent individuals from acting as investment advisers without the necessary registration from SEBI.
It has already been discussed how RBEIPL has entered into detailed agreements with investors and, based on these agreements, appears to be providing investment advice to its clients. Evidence suggests that RBEIPL is charging a “management fee” from its clients in exchange for this investment advice. For example, RBEIPL has charged 22% of the total investment amount of INR 5,50,847 (excluding taxes) for a 10-year investment period.
Furthermore, records indicate that apart from the upfront Management Fee charged from clients for investment advisory services, the agreements with clients also include provisions for sharing profits earned by investors through the investment advice provided by RBEIPL. For instance, as per clause 3.4 of the agreement with an investor[14], the investor is required to pay a performance fee based on a percentage of profits exceeding the hurdle rate. Similar provisions can be found with the note stating that profit sharing applies to amounts above Expected Returns.
In a shred of evidence, an investor has invested INR 25,00,000 in a lumpsum plan. A management fee of 22% (INR 5,50,847 plus taxes) has been charged. The expected return is 1000% and the profit sharing is 10%. According to clause 3.4 of the Wealth Management agreement, the performance fee will be calculated based on the profit above the hurdle rate.
Furthermore, it has been observed from the records that RBEIPL has admitted to providing investment advisory services to at least 290 unique investors between March 11, 2020, and August 29, 2023. It is also noted that RBEIPL has earned more than INR 12 Crore as a fee from these clients for providing investor advisory services without obtaining registration from SEBI.
Based on this, it can be concluded that RBEIPL may have violated the SEBI Act, 1992 and IA Regulations.
Issue 2 –
RBEIPLhas violated the SEBI Act, 1992and IA Regulationsby accumulating over INR 12 Crore from January 10, 2018 to September 30, 2023 through their investment advisory services. They have engaged in detailed agreements with investors, provided advice through emails, and requested contract notes to monitor holdings. A call recording revealed employees sharing information that could impact investors’ decisions, with investors blindly following RBEIPL’s advice.
RBEIPLhas also included profit sharing with investors in addition to management fees, encouraging investors to trade more in securities. An investor misunderstood a recommendation to sell shares as a ‘buy’ suggestion, resulting in 18 different companies’ shares being sold from her account without explanation. This suggests potential fraudulent behaviour. The agreement’s disclaimer requires all investors to opt for 100% investment in the equity segment, potentially mis-selling to investors with different risk appetites[15].
Based on the above discussion, it is evident that RBEIPLhas breached clauses (a), (b), and (c) of section 12A of the SEBI Act, 1992, along with the provisions of sub-regulations (a) to (d) of regulation 3 and sub-regulation (1) of regulation 4, as well as clauses (k), (o), and (s) of sub-regulation 4 of PFUTP Regulations.
Issue 3 –
Since the prima facie violation by RBEIPL has been established, it needs to be determined who should be held responsible under Section 27 of the SEBI Act. According to this section, if a company has violated any provisions of the Act or any related rules, regulations, directions, or orders, both the company and the individuals in charge of its business conduct will be considered guilty of the violation. They will be liable to face legal action and punishment. However, it’s important to note that if a person can prove that they were unaware of the violation or took all necessary precautions to prevent it, they will not be held liable under this Act.
The details of the current and past Directors of RBEIPL can be found mentioning that RBEIPLwas established, promoted, and controlled by Mr. Ravindra Bharti (Noticee no. 2) and Mrs. Shubhangi Ravindra Bharti (Noticee no. 3), who are also married to each other. As of March 31, 2023, Mr. Ravindra Bharti held 86.33% of the shareholding in RBEIPL, while Mrs. Shubhangi Ravindra Bharti held 10.10%.
It has been observed that following the addition of RBEIPL, its two Promoter Directors, Noticee no. 2 and Noticee no. 3, remained in charge until October 03, 2023. On September 22, 2023, just before their departure, Noticee no. 4 and Noticee no. 5 were appointed to the Board. SEBI had already started investigating and inspecting the Authorised Person, Mr. Balu Motiram, on the same day. Noticee no. 2 has a significant number of followers on his Youtube channels. Noticee no. 2’s influence over RBEIPLis evident from their similar names. Noticee no. 2 and Noticee no. 3, as Executive Directors, were responsible for the activities mentioned earlier. Therefore, they are prima facie responsible for the violations committed by RBEIPL. The activities related to investor advisory services or other regulated activities are ongoing. Noticee no. 4, Mr. Rahul Ananta Gosavi, became a Director of RBEIPL on September 22, 2023, after serving as Executive Assistant to CMD since October 2015.
Hence, Noticees nos. 4 and 5 are accused of being responsible for RBEIPL’s actions and instructions. They are also accountable for the alleged investment advisory activities, as there is no evidence of cessation after the resignation of Noticees nos. 2 and 3. Therefore, Noticees nos. 2, 3, 4, and 5 should be held accountable under section 27 of the SEBI Act for the violations committed by RBEIPL, based on their respective periods of Directorship[16].
LIST OF REASONS THAT JUSTIFY INTERIM ORDER:
There are multiple reasons supporting the need for an interim order[17] based on SEBI’s authority which are as follows –
- RBEIPLis facing clear securities law violations, and Noticee nos. 2, 3, 4, and 5 are also implicated under section 27 of the SEBI Act. These violations are significant breaches that emphasize the importance of a regulatory framework for investment advisors.
- The IA Regulations have been established to protect investors by setting strict requirements for net worth, education, and experience. However, RBEIPL’s unregistered status has allowed them to evade these obligations, collect fees from investors, and put their interests at risk.
- Additionally, the growing number of subscribers to Noticee no. 2’s YouTube channel, who are also shareholders of RBEIPL, raises concerns about potential influence and ongoing harm to investors. The ongoing unregistered activities are supported by documents submitted on December 18, 2023. SEBI had previously advised RBEIPLto provide specific details, but they have failed to comply, hindering SEBI’s investigation.
- RBEIPL provided a list of 290 clients for whom they claimed to have received money for investment advisory services, but only 141 payment details could be traced. This raises doubts about the accuracy of the information provided. Additionally, RBEIPL received over INR 12 Crore from investors between January 10, 2018, and September 30, 2023. Despite requests, RBEIPLhas refused to provide email communications with advisory clients, hindering SEBI’s examination.
Considering the above discussion, it is crucial to take immediate action to prevent any further harm to the investors’ interests that may arise from RBEIPL’s alleged unregistered investment advisory activities. Urgent regulatory intervention is necessary to put a stop to this and protect the investors.
CASE REFERENCES:
Furthermore, this case seeks to rely on the order of the following two cases –
Amalendu Mukherjee Vs. SEB/ (Appeal (L) no. 169 of 2020)
Amalendu Mukherjee was restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) in this case through an ex-parte order issued on February 12, 2018.
N. Narayanan Vs.Adjudicating Officer, SEB/ [(2013) 12 SCC 152]
In this particular case, the Supreme Court of India supported the ruling of the Securities Appellate Tribunal. They upheld SEBI’s order from April 18, 2011, which imposed a two-year ban on N. Narayanan’s involvement in any securities transactions.
INTERIM ORDER:
Based on the discussion mentioned earlier and following the court’s order, it became necessary to issue an interim impounding order to safeguard the securities market and prevent any illegal gains from being taken beyond regulatory control. Therefore, by utilizing the authority granted under various sections of the SEBI Act, 1992, the following directions have been issued through this interim order cum show cause notice, which will be made effective until further notice. The directions[18] are –
I. The individuals mentioned in the notice must immediately stop offering investment advisory services or presenting themselves as investment advisors, and refrain from engaging in any unregistered or fraudulent activities in the securities market.
II. The individuals mentioned in the notice are prohibited from buying, selling, or dealing in securities until further instructions are given. They can close any open positions in exchange-traded derivative contracts within 3 months or at contract expiry. They can also settle any pending transactions before the close of trading on the date of this order.
III. Individuals numbered 2 to 5 in the notice cannot associate with any SEBI registered intermediary until further instructions are given.
IV. RBEIPLmust surrender INR 12,03,82,130.91, representing the total unlawful gain from the alleged unregistered investment advisory business.
V. RBEIPLmust deposit the unlawful gains into an interest-bearing Escrow Account in a Nationalized Bank. The funds will be held as a lien in favour of SEBI and cannot be released without SEBI’s permission.
VI. Banks and Depositories must not make any debits from the accounts held by RBEIPL without SEBI’s permission, except for transferring funds to the Escrow Account. Credits into these accounts are allowed.
VII. Registrar and Transfer Agents are instructed not to allow any transfers or redemptions of securities held by RBEIPL. Noticees must not dispose of any assets without SEBI’s permission until the unlawful gain amount is credited to an Escrow Account.
VIII. Noticees must provide a complete inventory of their assets, bank accounts, demat accounts, and investments within 7 working days.
IX. Noticee No. 1(RBEIPL), 4, and 5 must refrain from collecting any money or fees from current clients for investment advisory services. They are also required to take down all online and offline materials related to unregistered investment advisory services immediately. These actions should be maintained until further notice for quasi-judicial proceedings.
[1] Note: The actual name of the stock-broker is not used in this order as the stock-broker is not a Notice in the instant proceedings at this stage. ABC Limited is a disguised name for reference purpose and actual name would be supplied to the Noticees during inspection and to Hon’ble SAT and Courts, during court proceedings.
[2] Securities and Exchange Board of India Act 1992.
[3] Securities and Exchange Board of India (Investment Advisers) Regulations, 2013.
[4] Situated at: “Office No 4010, 4th Floor Marvel Fuego, near Amanora Mall, opp. WeWork/ Seasons Mall, Magarpatta, Pune, Maharashtra 411028.
[5] Date of terminal allotment: August 24, 2023; date of terminal disablement: September 27, 2023.
[6] Date of terminal allotment: August 09, 2023; date of terminal disablement. November 23, 2023
[7] Date of terminal allotment: June 17, 2022: date of terminal disablement: October 19, 2023
[8]Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
[9]Sec 12(1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the 53[regulations] made under this Act: Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the said period of three months, till the disposal of such application: 54[Provided further that any certificate of registration, obtained immediately before the commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been obtained from the Board in accordance with the regulations providing for such registration.
[10] 3 (1)On and from the commencement of these regulations, no person shall act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from the Board under these regulations:11[***]12[(1A)Notwithstanding anything contained in sub-regulation (1), any application made by a person prior to coming into force of these regulations containing such particulars or as near thereto as mentioned in Form A of First Schedule shall be treated as an application made in pursuance of sub-regulation (1) and dealt with accordingly;](2)An application for grant of certificate of registration shall be made in Form A as specified in the First Schedule to these regulations and shall be accompanied by a non-refundable application fee to be paid in the manner specified in Second Schedule. 13[(3)On and from the date of commencement of these regulations, no person, while dealing in distribution of securities, shall use the nomenclature “Independent Financial Adviser or IFA or Wealth Adviser or any other similar name” unless registered with the Board as Investment Adviser.”]
[11]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 recognized 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 recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.
[12]CHAPTER –II RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS: Communication or procurement of unpublished price-sensitive information.
[13]CHAPTER –II RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS: Trading when in possession of unpublished price-sensitive information.
[14] Mentioned in paragraph 21 of Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
[15]According to the Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
[16]According to the Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
[17]According to the Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
[18]Para 57 of the Order in the matter of Ravindra Bharti Education Institute Private Limited(Apr 05, 2024)
