Text messages, emails or calls from firms in Indore offering stock tips are one of the most common types of spam communications that Indians receive. In a rare instance however, market regulator Sebi has acted against one such firm – Indore based StarIndia Market Research, imposing a penalty of ₹40 lakh on the firm. Securities and Exchange Board of India (Sebi) framed a detailed set of rules – the SEBI (Investment Advisors) Regulations in 2013 in order to ensure that customers are treated fairly and offered products suited to their risk profile. However the persistence of stock tip operators and get-rich-quick advisors seemed to indicate that the rules existed on paper only. The regulator’s order in case of StarIndia shows that it is getting serious about enforcing them.
According to Sebi’s adjudication order, StarIndia committed 3 types of violations. First it advised high risk products to people who were not suited for them. StarIndia offered high risk-products to 97 clients who were aged between 18 and 20 and some very senior citizens above the age of 80. The firm contended that it had offered 50 of these clients ‘cash market’ products rather than derivatives and hence they were not high risk, a defense that Sebi rejected. Out of the remaining 47 clients, 35 were offered derivatives products. Sebi found that the vast majority of these clients had incomes of ₹1-5 lakh and had no experience of trading in securities or were too old to be offered high risk products. “It is also noted that the Noticee relied upon KYC of its clients done by other agencies, and did not carry out a detailed risk profiling of its clients consistent with their experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss," the adjudication order stated.
Second, Sebi noted that products meant for High Net Worth Individuals (HNIs) were offered to those people who were clearly not HNIs. The adjudication order cited the case of Sagar Gupta. “He submitted that he had very less experience with equity investments and had no experience in commodity, forex investments. Having a gross annual income between ₹1-5 lakh to support 1-3 dependents with 0-20% of his monthly income to pay-off debts, Sagar Gupta chose to invest ₹1-2 lakh in the market," the order observed. Another client, Pawan Mandal who was offered an HNI product had a gross annual income below ₹1 lakh with 1-3 dependents to support and had an emergency fund of less than a month’s income.
Third, the regulator found that clients were charged fees twice or more for the same service over the same duration. The notice sent by Sebi alleged that ₹20 lakh was collected from 40 clients in this manner. StarIndia contented that this was due to software error and in some instances invoices were sent with a zero amount. However Sebi in its order found that the firm was unable to prove its contentions. Referring to a specific instance, the order said “I also note that what is referred to as fees by the Noticee are fairly large amounts, going to as high as ₹20.52 lakhs in case of client Gajender Kaushik." Finally, the regulator noted that clients were charged fees in advance for services to be rendered subsequently such as intra-day trading. In doing so, StarIndia did not charge its clients in a fair and reasonable manner, Sebi held.
The regulator’s order is a sign to the industry that it is getting serious about enforcing the rules in place for investment advisors. It comes in the wake of numerous instances of fraud and mismanagement of investor money by financial services providers, many of whom are based in Indore. In July, Indore police arrested 20 people associated with Trade India Research which allegedly promised high returns and opened demat accounts for customers without their knowledge. In its push to stop such operators and practices, Sebi has a long way to go.