The Securities and Exchange Board of India (Sebi) on September 15, 2023 said that it has taken action against an investment advisor for overcharging clients and for not maintaining proper ‘know your customer’ (KYC) records.
The regulator fined investment advisor Manu Chhabra Rs 4 lakh for charging his clients above the permitted limit and for failing to keep details of Permanent Account Number (PAN) for two-thirds of his clientele.
Sebi’s actions against Manu Chhabra underscore the importance of stringent compliance with regulatory norms in the financial advisory sector and the need for investors to exercise due diligence when engaging with investment advisors.
Excessive Fees Charged
Sebi revealed in an order dated September 15, in which the accused was found to have charged one of his clients Rs 5.16 lakh in just one month, in January 2022.
This exorbitant fee was in direct violation of the guidelines and regulations set by Sebi for investment advisors. According to these regulations, the maximum permitted fee for that period is a mere Rs 1.25 lakh. Sebi currently recognises two fee types for Registered Investment Advisors (RIAs) – flat fees capped at Rs. 1.25 lakh annually or a fee equivalent to 2.5 per cent of the assets under advice per year.
Inadequate KYC Records
Chhabra also failed to maintain proper PAN details of a large portion of his clients, which was also mentioned in Sebi’s order. Out of his total client base of 157, he could not produce PAN details for 107 clients, which is a violation of KYC norms.
The Sebi order addressed Chhabra’s justifications for this lapse, such as citing data corruption issues and client refusals to provide their PAN details. The regulator also categorically rejected these reasons and held Chhabra accountable for not complying with securities laws.
Sebi said in its order: “The reasons stated, such as data corruption issues and refusal by the clients to provide the details cannot be accepted. I (the adjudicating officer) hold that (Manu Chhabra) is a Sebi-registered intermediary and it cannot absolve its responsibility in compliance with securities laws.”
Chhabra had collected a staggering total fee of over Rs 36.79 lakh from his 157 clients. Out of this amount, approximately Rs 12.06 lakh was collected from the 50 clients for whom PAN details were submitted. The rest, Rs 24.73 lakh came from the 107 clients whose PAN details were unavailable with him. Among the total of 157 pieces of data, 13 have been categorised as potentially compromised due to reported with data corruption issues, the order said.
Sebi's Proposed Mechanism of Fees collection
This incident comes on the heels of Sebi’s proposed mechanism for the collection of fees by investment advisors (IAs) and research analysts (RAs). On August 25, 2023, Sebi proposed a new system wherein all client payments would be processed through a designated platform closely monitored by a Sebi-recognised body. The aim is to prevent unregistered IAs and RAs from potentially misleading investors.
In light of these recent developments, it is to be highlighted that individuals seeking the services of a Sebi-RIA should exercise caution. Recommendations from peers, background research, and a thorough evaluation of an advisor’s credentials and fee structures are strongly advised.
Further, it’s essential to note that being part of a financial planning association does not guarantee fiduciary status. During the initial meeting with advisors, clients should inquire about their fiduciary status, revenue sources, financial planning approaches, the services offered by them services, and their clientele.
