Indore case exemplifies how RIA licence can be misused

Sebi has cancelled Money Market Manthan’s licence for cheating investors, fined it  ₹8 lakh. (Mint)
Sebi has cancelled Money Market Manthan’s licence for cheating investors, fined it 8 lakh. (Mint)

Summary

In their quest for bigger returns, investors fall easy prey to a host of financial intermediaries such as mutual fund distributors.

Investors are a gullible lot. In their quest for bigger returns, they fall easy prey to a host of financial intermediaries such as mutual fund distributors. Many wary investors have instead opted to deal with investment advisers—the ones who have registered with the Securities and Exchange Board of India (Sebi) and have to comply with several guidelines before they can offer advice for a fee. Yet, what if such advisers themselves were to commit fraud. That is exactly what Indore-based investment advisory Money Market Manthan Financial Services did, as per an investigation by the market regulator.

There are 1,329 Sebi-registered investment advisers in the country. And, despite all the regulations put in place by the market regulator to ensure the protection of investor, Sebi discovers that some of them are, well, scamming their clients. Last month, Sebi released an order against Money Market Manthan Financial Services, once upon a time a registered investment adviser. Sebi had exactly 11 reasons to justify that the company was defrauding its clients.

Being deceptive

One way to make money in the stock market is to be really good at understanding financial statements, macroeconomic factors, making financial models. You take some risk and make some money if things work out. An arguably better way to make money is to not invest your own money in the market and instead advise someone else to invest theirs, and charge them for the advice. The only thing that matters here are good marketing skills. So, how exactly does an investment adviser be good at marketing?

Fund managers can point to their past fund performance and wink while they put out the disclaimer that past performance isn’t indicative of future returns. But investment advisers don’t manage money, they just give out advice!

Here’s what Vicky Kamariya, who ran Money Market Manthan, put on the firm’s website, as per an extract from the Sebi order. “Equity Cash Intraday: You are definitely going to make profits if you make investments on the basis of stock cash tips given by our team who solely work for researching the news and stocks. You can subscribe our services at reasonable package and then get up to intraday basis calls every day, weekly and monthly reports, chat sessions and dedicated customer service support for becoming a successful trader and make big profits with small investments on regular basis".

 

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The statement, ‘You are definitely going to make big profits with small investments," has a nice ring to it. Unfortunately, Sebi is not convinced by promises of any sort of fixed returns when it comes to the equity markets. This one was out-and-out illegal!

Now, for a quick question. When you sign up for something with your email address and get a welcome email—how often do you read the contents of that email? Investment advisers are mandated to inform clients of the risks associated with investing, not guarantee returns.

Kamariya, in his response to Sebi, said that he did inform his clients about the risks. In the welcome email! Here’s what Kamariya said: “The noticee did not offer /provide any guaranteed returns, which was also mentioned on Noticee’s website. Further, in the ‘welcome mail’ sent to the clients while onboarding them, the following was clearly mentioned: ‘Stock market has inherent market risk; hence, we do not claim any profit guaranteed services.’ Noticee do not provide any profit sharing services, guaranteed service and services which are not mentioned (on) our website."

Money Market Manthan does not guarantee profits and only provides services mentioned on its website. But its website guarantees profits. A fine example of a paradox.

Risk profiles

Before investment advisers give out advice, they must understand how much risk their client can (and wants to) take. They can’t give the same investment advice to a fresh graduate with their career ahead of them and individuals in their 40s who are struggling to repay their home loans.

This is the reason that Sebi mandates investment advisers to do risk profiling of all their customers. So, Money Market Manthan did this risk profiling of its clients, for some of them at least. The investors were assigned one of three risk statuses—low risk, medium risk, high risk—based on how they answered a questionnaire. There were questions like ‘What’s your investment goal?’, ‘What’s your income?’, and ‘How much do you want to invest?’

So far, so good. The problem was in what happened when someone wasn’t assigned high risk based on the questionnaire. In August 2019, one of Kamariya’s clients was assigned medium risk based on the questionnaire. Less than 30 days later, in September, the risk profile was updated to high risk, the Sebi inquiry found. The company apparently had a trick up its sleeve. Its sales team was asked to call up this client and make him re-answer some of the questions. Here’s one of the questions: ‘High risk is associated with high return, medium risk is associated with medium returns and low risk is associated with low returns? What risk can you bear (not prefer)?’

If someone asks you whether you want high returns or low returns, you would most likely say that you want high returns. Thereafter, your risk profile would be marked as high tisk and you would start getting advice to buy random derivatives. That seems to be precisely what the company did.

Super high fees

Money Market Manthan went to great lengths to simultaneously follow, and disregard, Sebi rules, so it does not come as a surprise that the firm was also overcharging its clients. (See graphic on the charges collected from clients, as per the Sebi order.) These figures are bizarre! It sounded like the investor wanted to invest 1 lakh and was also willing to pay 3 lakh as fees for high returns. Instead, if you were to put the entire 4 lakh in a fixed deposit, you can get better returns.

Money Market Manthan, however, didn’t just charge the full fees all at once. The fees started low, then suddenly spiked. The initial fee began at around 5,000. And the client makes a profit at first, always! The firm wins their trust. Then suddenly, the client has the chance to buy an exclusive service available only to high net worth individuals (which the client is not) and stands to gain a lot. And that’s that! In one instance, Money Market Manthan charged 4.6 lakh as fees and promised to turn the client’s investment into 22 lakh (the initial investment unknown). The company did not respond to emails on the Sebi order.

The bare minimum

Kamariya was fined a mere 8 lakh for all of the fraud that he did. Sebi decided that he had violated four sections of the securities law but for some reason went with the minimum penalty for each section. This was in addition to Sebi cancelling the company’s investment adviser licence,

Between 2018 and 2019—the time period examined in Sebi’s investigation—Money Market Manthan had collected 1.4 crore in fees.

If an investor files a complaint against a Sebi-regulated entity on its complaint redress system SCORES, the firm must take some action to resolve the complaint. Money Market Manthan obviously has a ton of pending complaints on SCORES, most of which are presumably demanding their money back.

Sebi fined Money Market Manthan just 8 lakh but it also directed the firm to resolve its pending complaints on SCORES. Resolving these complaints might just mean issuing refunds to all the investors who were defrauded.

Shreedhar Manek is the author of the finance newsletter BoringMoney.in

(To read the Sebi order in the enquiry proceedings against Money Market Manthan Financial Services, go to https://www.sebi.gov.in/enforcement/orders/jul-2023/order-in-the-enquiry-proceedings-against-m-s-money-market-manthan-financial-services_73974.html)

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