Appellate Tribunal Clarifies Penalty Standards and Compliance Duties under the SEBI’s Investment Adviser Regulations

Introduction

The case of CapitalVia Global Research Ltd. v. Securities and Exchange Board of India[i] concerns regulatory action initiated by SEBI against the registered investment advisory firm, CapitalVia Global Research Ltd., for multiple and repeated violations of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (‘IA Regulations’).

The Securities Appellate Tribunal was called upon to examine both procedural objections (including delay, denial of natural justice, and alleged double jeopardy) and substantive violations (ranging from deficient know your customer (‘KYC’) procedures to charging exorbitant fees and offering potentially misleading advice). The judgment offers pivotal guidance on the applicability of regulatory circulars, the nature of fiduciary duties imposed on investment advisers, and the proportionality of penalties imposed under s.15HB of the SEBI Act, 1992 (‘Act’).

Factual Background

CapitalVia Global Research Ltd. (‘Appellant’), registered as an investment adviser in 2014, faced allegations of violating IA Regulations during inspections conducted in 2015 and 2017. Complaints from investors (2013–2017) highlighted promises of assured 10% returns, which were not met, the absence of post-subscription guidance, and disproportionately high fees relative to client investments. SEBI’s inspections revealed deficiencies across multiple compliance fronts:

• KYC Non-Compliance: Failure to download client KYC forms from the KYC Registration Agency (‘KRA’) prior to April 2015, contravening SEBI circulars dated 05.10.2011 and 23.12.2011.

• Risk Profiling Gaps: Incomplete client questionnaires often lack critical fields, such as investment objectives and risk appetite.

• Suitability Assessment Failures: Advising products without client-specific evaluations, relying instead on generic oral disclosures and website content.

• Misleading Disclosures: Omission of loss-making recommendations from performance track records and failing to disclose product risks in advertising materials.

Thus, a consolidated show cause notice (‘SCN’) dated 28.09.2021 was issued, culminating in SEBI’s penalty order. The Appellant contested the proceedings on the grounds of procedural delays, double jeopardy, and disproportionality of the penalty.

Tribunal’s Analysis And Decision

A.  Procedural Challenges

• Delay in Proceedings

  The Appellant argued that the six-year gap between the 2015 inspection and the 2021 SCN rendered the proceedings time-barred. The Tribunal rejected this contention, noting that subsequent complaints in 2017 revealed fresh violations, justifying a consolidated SCN. The Tribunal further emphasized the absence of statutory limitation periods under the SEBI Act, provided delays are reasonable and non-prejudicial. The Appellant failed to demonstrate material prejudice, and the avowed objective of investor protection outweighed procedural technicalities.

• Double Jeopardy

  The Tribunal dismissed the claim of double jeopardy, clarifying that proceedings before the whole-time member and Adjudicating Officer targeted distinct violations under separate statutory provisions.

• Natural Justice in Settlement Rejection

  The Appellant’s settlement application under SEBI’s 2019 Settlement Regulations was rejected without a hearing. The Tribunal upheld SEBI’s decision, citing Section 15JB(4) of the SEBI Act, which bars appeals against settlement orders.

B.  Substantive Violations

• KYC Non-Compliance (Reg. 15(8))

  The Appellant admitted in its 07.072015, letter that it had not downloaded KYC forms from KRA before April 2015. SEBI’s 2011 circulars, though not explicitly mentioning ‘investment advisers,’ applied to all intermediaries. The Tribunal emphasized that the Appellant’s 2014 registration conditions mandated KRA compliance, rendering its defences untenable.

• Risk Profiling (Reg. 16)

  SEBI’s inspection in 2015 revealed that client risk questionnaires were incomplete, with fields such as investment horizons left blank. The Tribunal rejected the Appellant’s post-hoc submissions of pre-inspection documentation, noting that contemporaneous evidence of non-compliance remained unchallenged. Risk profiling, as a fiduciary duty, requires dynamic and individualized client engagement, not retrospective rectification.

• Suitability Assessments (Reg. 17)

  The Appellant’s reliance on website disclosures and oral communications failed to satisfy Regulation 17’s mandate for documented, client-specific suitability assessments. The Tribunal underscored that advisers must bridge the ‘information asymmetry’ between themselves and clients through structured evaluations, not generalized disclaimers.

• Disclosure Deficiencies (Reg. 18)

  The Appellant’s performance track record excluded loss-making recommendations, misrepresenting accuracy rates. Its formula, dividing profitable recommendations by total calls, ignored the materiality of losses. The Tribunal held that such selective disclosures violated sch. III of the IA Regulations, which mandates holistic transparency to enable informed investor decisions.

C.  Proportionality Of Penalty

Under s. 15J of the SEBI Act, penalties must reflect the gravity of default, investor loss, and repetitiveness of violations. While SEBI levied Rs. 1 crore for 13 violations, the Tribunal reduced the penalty to Rs. 70 lakhs after dismissing four charges:

Aggravating Factors

• Repeated non-compliance across two inspections (2015 and 2017).

• Systemic disregard for KYC and suitability safeguards.

• Misleading performance metrics affecting market integrity.

Mitigating Circumstances

• Partial post-2017 KYC remediation.

• Absence of proven investor financial loss.

The recalibrated penalty balanced deterrence with fairness, acknowledging the Appellant’s corrective steps while condemning its initial fiduciary lapses.

D. Regulatory Implications

• Dynamic Compliance Standards: SEBI’s circulars bind intermediaries, irrespective of their registration timelines, requiring the proactive adoption of evolving norms. The living instrument doctrine ensures regulatory frameworks adapt to market complexities.

• Client-Centric Advisory Practices: The ruling clarifies that website disclaimers cannot substitute individualized suitability assessments. Advisers must document client interactions to mitigate risks associated with asymmetric information.

• Transparency in Disclosures: Performance metrics must inclusively represent both profitable and loss-making recommendations. Selective reporting undermines investor trust and violates statutory obligations.

Conclusion

The Tribunal affirmed SEBI’s findings on nine violations but moderated the penalty to Rs. 70 lakhs, underscoring the necessity of proportionality in enforcement. The judgment reinforces three pillars of investment advisory regulation:

• Procedural Rigour: Consolidated proceedings are permissible where new violations emerge, ensuring efficient adjudication.

• Fiduciary Accountability: Advisers must prioritize client-specific compliance over procedural formalisms.

• Deterrence-Calibrated Penalties: Penalties must reflect both culpability and corrective potential to sustain market integrity.

This decision reinforces SEBI’s mandate to strike a balance between investor protection and equitable enforcement, thereby fostering a culture of compliance in India’s securities market.

End Note

[i] 2025 SCC OnLine SAT 233 dated 05.03.2025.

Authored by Divya Pandey, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.