In acting against finfluencers, Sebi can do more for investors

Sebi’s actions against unregistered finfluencers needs to be more severe for it to act as a deterrent

The Securities and Exchange Board of India (Sebi) on May 26 agreed to a ‘settlement’ with persons alleged to be unregistered investment advisers but who yet gave advice to clients and earned crores of rupees as fees (such persons incorrectly referred to as ‘finfluencers’ in media).

Under the settlement, the finfluencer was asked to deposit the fees so earned of about Rs 4.6 crore, plus interest at 12 per cent per annum of about Rs 1.48 crore (thus, totally Rs 6.08 crore). Further, settlement charges aggregating to Rs 46.8 lakh (Rs 15.6 lakh each on the three noticees) were levied, and they were also debarred from dealing in securities in India for one year.

There are many disturbing parts to the Sebi order. If the parties have indeed indulged in wrongdoing, then neither was justice done to the clients who lost their monies to unregistered advisers, nor has a sufficient deterrent created. Before we go into more details, let us summarise the broad scheme of the law here.

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The Regulation

Sebi requires any person giving advice, and/or recommendations to be registered as an Investment Adviser or Research Analyst, and follow the detailed rules, and code of conduct laid down by it. If a person still engages in such activities (and as past orders show, countless people have engaged) without registration, Sebi can pass several penal/remedial actions such as debarment, penalty, orders to refund monies collected from clients, disgorgement, etc.

These proceedings, however, may take a long time and high costs for both sides. Hence, Sebi has regulations to permit settlement where the accused can come forward and propose closure of the matter. They would make an application and propose various actions they would take in accordance with a detailed table laid down in these regulations. The application, supervised by an independent high-powered committee, may then be accepted by Sebi and the accused can then comply with the terms and get a closure of sorts. In particular, the applicants can say in the application, which the accused too have done in the present case, that they neither admit nor deny the accusations.

The Usual Procedure

Sebi has frequently in the past, and curiously also on the same day as this particular settlement order, passed penal orders against unregistered investment advisers and similar others. Typically, Sebi comes to know of such persons operating and collecting monies and then carries out extensive investigations. It collects information from banks, social media channels, the Internet, etc. It may then confront the accused and after giving a hearing, pass orders.

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Typically, the order requires the accused to refund the monies collected. To ensure that this is indeed done, Sebi even requires a public advertisement so that all clients who have paid can come forward. Sebi also requires detailed documentation of the repayment, including a certificate from a chartered accountant that this has indeed been duly done. The accused may also be restrained from the securities markets, and a penalty levied too.

Such orders are commendable for several reasons. First, the clients get their monies back since often such fees are collected on false promises and by unlicensed, unregulated, and possibly unqualified advisers. Second, stiff penalties would act as a deterrent to others who may be tempted to similarly engage in such activities. Third, the debarment, apart from acting as further deterrent, insulates the markets from such persons for at least a certain period of time.

No Monetary Relief

In the current case, however, consider what happened.

The fees collected (including interest) was more than Rs 6 crore. This amount, however, was not refunded to the investors, but was disgorged by Sebi. While not specifically stated in the settlement order, in view of Section 11(5) of the Sebi Act, such disgorged amount may get credited to Sebi’s Investor Protection and Education Fund. There can be no two views that what gets credited to such a fund would be used for general protective and educative measures for investors in the manner prescribed.

However, this is a clear loss to the investors whose monies these amounts really are. More so, as mentioned earlier, in past orders including at least three orders passed on that same date, Sebi has typically asked the unregistered advisers to refund the monies to the clients. So, while the unregistered adviser is deprived of their allegedly ill-gotten gains, the persons who have incurred this loss get no monetary relief — except the satisfaction of action being taken against the unregistered adviser.

The settlement regulations do provide specifically that Sebi, while looking into the merits of a settlement application, can consider whether the money lost by the applicant be ‘refunded or disgorged’. In such a case, particularly considering past orders, justice would have demanded that those whose funds were collected should have got their monies back.

Hardly A Deterrent

Then there are at least two other aspects of this order that are of concern.

First, the settlement charges came to a mere sum of Rs 45.6 lakh, which is barely 10 per cent of the collection of Rs 4.6 crore. Hence, this can be seen as hardly as a deterrent. The Sebi Act provides for penalty of up to three times the amount of profits wrongfully made. That means, if the proceedings had returned a guilty order, the penalty could have extended up to Rs 13.8 crore.

Now, if a person (the unregistered adviser) comes forward to buy peace in the form of a settlement, it may not be just levying such a huge amount. Even so, ~10 per cent or Rs 45.6 lakh is hardly a deterrent. For this purpose, Sebi may need to consider whether the settlement regulations need a rehaul or whether other forms of stiff deterrents be provided for.

Second, the order also provides that the applicants shall not deal in securities markets for one year. This also does not appear to be a strong enough deterrent. Notably, the debarment is only on dealing in securities markets, and not on other activities in the market.

To reiterate, the purpose of deterring action is not just to punish a wrong doer, but also set as an example to others not to engage in such unlawful acts. This principle should apply even to cases of settlement where the noticees come forward to settlement without admitting or denying the wrongs.

To conclude, it is creditable how Sebi goes after mushrooming unregistered advisers. In recent times, almost every week one sees several orders being passed against such persons. In this case too, Sebi recorded the details of its investigation which included studying the websites of the applicants, following up and collecting information from the payment intermediary Razorpay, collecting KYC documents from the bankers and Razorpay, etc.

Greedy and gullible investors cannot be always protected, but at least those who allegedly profit from such investors can be penalised. The question is whether the penal action is proportionate to the wrongdoing, which stops others in their tracks.

(Jayant Thakur is a chartered accountant)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH