Securities and Exchange Board of India (Sebi), on August 20, 2023, suspended the registration of Indore-based 3M Team Research Pvt. Ltd. for one year. This decision comes in response to several violations and allegations against the company, registered with Sebi as an investment adviser.
Background
The regulator received several complaints regarding the company between 2016 and 2017 through the Sebi Complaints Redress System (SCORES). The complaints alleged that company was posing as a Sebi-registered portfolio manager. Investigations revealed that the company was indeed presenting itself as a Sebi-registered portfolio manager without obtaining the necessary Certificate of Registration in a clear violation of Sebi's Portfolio Managers' Regulations.
Further, the company had been making misleading claims on its website, specifically offering assured returns. An accused linked to the company, Rakesh Sethi, allegedly enticed investors, including complainants, to open trading and demat accounts.
A final order on this case was issued on August 4, 2022, confirming the charges against the company. Subsequently, in February 2023, the Designated Authority (DA) recommended suspending the company's registration for one year. However, the company argued that Sebi had already imposed a monetary penalty of Rs. 10 lakh, and further suspension would be excessive.
Sebi's Order and Lessons for Investors
Sebi's order said that after advertising unrealistic returns and tall claims, the noticee could not escape liability and hide behind the argument that the claims were only estimates based on available financial models.
Sebi's decision to suspend the company's registration aligns with the regulations of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations. The regulations state, "No person shall directly or indirectly in an advertisement that is misleading, or that contains information in a distorted manner and which may influence the decision of the investor; disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities."
Furthermore, Sebi found that Rakesh Sethi, one of the directors of 3M Team Research Pvt. Ltd, had conducted trades for the company's clients as an Associated Person (AP) of Arihant. Complaints against the company alleged that it encouraged clients to open trading accounts with Arihant, where Sethi served as an AP.
As per rules, there's a requirement to separate execution services from investment advisory services. Companies registered as investment advisers must maintain a distinct relationship between these functions, ensuring clients are not compelled to use the same entity for distribution or execution services. Sebi emphasises that any fees or charges for distribution or execution services should be paid directly to the service providers, bypassing the investment adviser.
What Investors Should Learn
This case serves as a valuable lesson for investors. It underscores the importance of verifying the credentials of investment advisory firms and their compliance with SEBI regulations. Investors should exercise caution when companies make unrealistic promises and assured returns, as these may be misleading. Before choosing an IA, recommendations from friends and peers, background research, and scrutinising an advisor's credentials and fees should be made. In the initial meetings, clients should ask advisors about their fiduciary status, revenue sources, services, and clientele.
Additionally, investors should be aware of the regulations to protect them and report any suspicious activities to Sebi through platforms like SCORES. Investors can approach Scores as highlighted here:
Clarification: The reference to “3M” in this article does not have any association with 3M India Limited or 3M Company, USA or any of its associate companies. 3M, is a registered trademark of 3M Company, USA, which is a diversified technology company with a global presence in the following businesses: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
