A registered investment advisor (IA) was found to have collected fees higher than the clients' total investible amount in multiple instances.
In fact, in one instance, the IA had collected a fee that is more than 4x the client's investable amount and in another instance had collected a fee that is "almost equal" to a client's annual income.
Under the Sebi regulations, an IA is not allowed to charge more than Rs 1.25 lakh per annum per client and has to recommend services/products to a client based on a suitability assessment. The IA's fee collection mechanism was found wanting in both counts.
In an order dated October 22, the Securities and Exchange Board of India (Sebi) fined the IA named Capital Vraddhi Financial Services (Registration number INA000005291) Rs 40 lakh for this and other violations including promising guaranteed returns even Rs 12-15 lakh profit a year, creating fake reviews to promote their services, not acting against employees who were providing investing tips to clients to win them over and providing free trials to clients.
On the fee charged, the regulator found that in three instances the IA had charged more than the clients' investable amount and in one instance nearly all of the client's investable amount.
One client had less than Rs 1 lakh as investable amount and the IA had charged Rs 4,72,000 as total fees. Another had between Rs 50,000 and Rs 2 lakh as investable amount and the fee charged was Rs 2.91 lakh and a third had less than Rs 1 lakh as investable amount and the fee charged was Rs 2.28 lakh.
A client had given the annual income as between Rs 1 lakh and Rs 5 lakh and the IA had charged Rs 4.72 lakh as fee, which is nearly all of the client's annual income.
Sebi's officials also found that the IA's staff did not have requisite certification. Out of the IA's 40 employees, 38 employees were involved in providing investment advice and in this only 2 were having the necessary certifications from NISM. Thirty six were non-compliant with respect to the certification and when the regulator's inspection team was visiting 19 among these 36 were continuing to provide investment advisory services.
In the order, the Adjudicating Officer Barnali Mukherjee noted that the IA had failed in its fiduciary duties towards its clients and that it had defrauded the investors in the securities market.
Mukherjee wrote, "This violation of the Noticee, if dealt with lightly could seriously undermine investors confidence in the securities market and has to be viewed seriously and calls for appropriate penalty."
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