SAT provides relief to Investment Advisers

The Securities Appellant Tribunal (SAT) through its order Re Vijay Kumar Gaba Vs.
Securities and Exchange Board of India (SEBI) (29 March 2019) has provided material
relief to thousands of professionals who have been providing services as investment
adviser since before 21 April 2013 when SEBI (Investment Advisers) Regulations 2013
came into effect.

The said regulations require that from 21 April 2013 "no person shall act as an
investment adviser or hold itself out as an investment adviser unless he has obtained a
certificate of registration from SEBI under these regulations". The person acting as
investment adviser prior to this date were allowed a period of six months to apply to
SEBI for a registration certificate under these regulations.

It may be noted that prior to date when these regulations came into effect, the
profession of investment advisory was not regulated by any securities market related
regulation. Investment advisers were therefore subject to the regulation under
common law of the land.

The Concept Paper on Regulation of Investment Advisers issued by SEBI in 2011

stated as follows:

"The proposed regulatory framework intends to regulate the activity of providing

investment advisory services in various forms by a wide range of entities including
independent financial advisors, banks, distributors, fund managers etc. The investment
advice may be provided for investments in various financial products including but not
limited to securities, insurance products, pension funds, etc. While the activity of giving
investment advice will be (emphasis supplied) regulated under the proposed framework
through an SRO, issues relating to financial products other than securities shall come
under the jurisdiction of the respective sectoral regulators such as action for mis ‐selling,
violation of code of conduct, conflict of interest etc."

Incidentally in order Re. CapitalVia Global Research Limited (20 January 2017) also
the Whole Time Member of SEBI admitted that "The object of the IA Regulations, inter
alia, was to lay down a framework for independent financial advisers which was
absent till 2013 (emphasis supplied) and to address the conflict of interest arising
due to the dual role (advisory and sale) played by the distributors of financial
products."

However, contrary to the intent of the said regulations, the whole Time Member, in his
order Re Vijay Kumar Gaba dated 28 October 2016 had implied that prior to SEBI
(Investment Advisers) Regulation coming into effect in April 2013, investment advisers
were required to register with SEBI under the SEBI (Portfolio Managers) regulation,
1993. The said order read as follows:

"A 'portfolio manager', in terms of regulation 2(cb) of the PMS Regulations, is any person
who pursuant to a contract or arrangement with a client, advises or directs or
undertakes on behalf of the client (whether as a discretionary portfolio manager or
otherwise) the management or administration of a portfolio of securities or the funds of
the client, as the case may be. The definition of portfolio manager squarely covers the
activity of ‘advising’ the client. There can be portfolio managers who would offer only
investment advisory services to their clients. Any person offering investment advice to
the client in respect of funds or securities shall be a portfolio manager. This intent is very
clear from the definition of the term ‘portfolio manager’ under the PMS Regulations."

This order made all investment professionals who were "advising" their clients prior to
21 April 2013, liable to register themselves with SEBI as portfolio manager. Those
advisers who were not registered under SEBI (Portfolio Managers) Regulation were
impliedly acting in violation of regulations and hence were subject to regulatory
punishment under various provisions of SEBI Act and Portfolio Manager regulations.

On appeal against the mentioned SEBI order, vide order Re Vijay Kumar Gaba Vs.
Securities and Exchange Board of India (SEBI) dated 29 March 2019, SAT has settled
the issue categorically. SAT clearly stated in the said order that—

"3. In Financial world, portfolio management is understood as a discretionary portfolio

management or non-discretionary portfolio management. So far as non-discretionary
portfolio management is concerned the manager cannot himself undertake to invest or
take decision regarding the portfolio. He / she has to counsel the investors first. So far
as the discretionary portfolio management is concerned the portfolio manager is given
full leeway to make decisions for the investor. Thus, mere advice itself regarding any
investment would not be enough to bring any person within the clutches of the definition
of portfolio manager.
4. It is to be noted that in the year 2013, SEBI came with independent regulations called
as Securities and Exchange Board of India (Investment Advisers) Regulations, 2013
whereunder certain norms are fixed for investment advisors, inter-alia, requiring them to
be registered. However, during the present period in question no such regulations were
in existence."

Investment advisers operating from before April 2013, who have already registered
with SEBI under SEBI (Investment Advisers) regulations 2013, can now therefore take
a sigh of relief and continue with their work without any fear.

Facts of the case

Vijay Kumar Gaba was operating as investment adviser in Delhi for many years till
June 2007. He was apparently advising stock brokers and few NBFCs on matters
relating to macro economic trends and their investment implications.

He admittedly provided investment advisory service to one Mr. Madan Mohan Sharma
of Patna, a prominent political leader for 3 months from June to September 2006 on
trial basis. Dissatisfied with the macro economic and strategic advice Mr. Sharma
discontinued the services stating he is looking for specific stock trading advice only.

From June 2007 Vijay Gaba shifted to Mumbai and joined a large multinational
investment bank as investment strategist. From December 2010, Mr. Sharma started
threatening and blackmailing Vijay Gaba. A lengthy criminal litigation and counter
litigation followed in which all matters have been decided in favor of Vijay Gaba,
including by Patna High Court and Supreme Court. A criminal complaint was filed by
Mr. Vijay Gaba against Mr. Sharma on which a Delhi MM Court took cognizance
under section 483, 506 and 37 of IPC. Additional Session Judge however quashed the
said cognizance stating that this complaint is merely a counterblast for the litigation
filed by Mr. Sharma. The matter is still pending in Delhi High Court.

An RTI inquiry in 2014 revealed that Mr. Sharma also made several complaints with
SEBI and Stock Exchanges. SEBI and BSE refused to take any action on such
complaints finding it prima facie frivolous.

However, at the insistence of a Rajya Sabha MP, in November 2014 SEBI issued a
notice to Vijay Gaba and proceeded to pass an ex parte interim "cease and desist" order
against him, 8years years after the alleged transaction took place!
Strangely, SEBI passed this very damaging interim order even though in its final order
dated 15 July 2015 it admitted that "there appears to be no material on record at this
stage to suggest that the noticee had continued with such activities post June 2007."
Notwithstanding, WTM restrained Vijay Gaba "from making an application to SEBI for
offering portfolio management services or investment advisory services or any activity in
the securities market requiring registration for a period of one year."

The said 16 July order of SEBI was quashed by SAT through its order dated 26 July
2016, which asked SEBI to reconsider the matter and pass an appropriate order.

Pursuant to SAT direction SEBI freshly examined the matter and passed the following
order dated 28 October 2016—

"SEBI vide Order dated July 15, 2015, had restrained the noticee from making an
application to SEBI for offering portfolio management services or investment advisory
services or any activity in the securities market requiring registration for a period of one
year. I note that the noticee has already undergone the period of prohibition as imposed
vide the SEBI Order. Further, there is no record to suggest that the noticee continued
with such activity post 2007. Therefore, I am of the opinion that such prohibition, which
has already been undergone by the noticee, would be commensurate with the breach.
With the above observations, I hereby dispose off the instant proceedings in respect of
Mr. Vijay Kumar Gaba."

This order has now been completely set aside by SAT vide order dated 29 March 2019.