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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
S.C. Gupte, M.S. Karnik, JJ.
Purnartha Investment Advisers Private Limited - Appellant
Versus
Securities And Exchange Board Of India & Anr. - Respondents
Writ Petition (L) No. 638 of 2021
Decided On : 18-06-2021
SEBI - Constitutional Validity of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020 - Section 11, Section 12, Section 19, Section 30 of the SEBI Act - Summary of Acts and Sections: The court discussed the constitutional validity and vires of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020, which introduced Regulation 15A providing for modes of charging fees to clients by Investment Advisors. The court analyzed the SEBI Act, particularly Section 11, Section 12, Section 19, and Section 30, which provide for the functions of the Board, registration of professionals, delegation of powers, and power to make regulations, respectively. The court examined the authority of SEBI to make regulations concerning fees charged by Investment Advisors and the specific powers delegated to the Board under the SEBI Act.
Fact of the Case:
The Petition challenges the constitutional validity and vires of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020, which introduced Regulation 15A providing for modes of charging fees to clients by Investment Advisors. The Petitioner claims that SEBI has no authority under the SEBI Act to make regulations concerning fees charged by Investment Advisors and that the impugned Regulation and Circular breach the Petitioner's fundamental right to practice a profession or business of its choice.
Finding of the Court:
The court found that SEBI has the requisite authority under the SEBI Act to make regulations concerning charging of fees by Investment Advisors from their clients. The court held that the power to regulate the working of Investment Advisors includes the power to make provisions concerning fees to be charged by Investment Advisors from their clients. The court also determined that the impugned Regulation and Circular do not prohibit Investment Advisors from carrying on their business or profession, but rather put reasonable restrictions on their right to charge fees.
Issues: The issues in the case revolved around the constitutional validity and vires of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020, and the authority of SEBI to make regulations concerning fees charged by Investment Advisors.
Ratio Decidendi: The court's decision was based on the interpretation of the SEBI Act, particularly Section 11, Section 12, Section 19, and Section 30, which provide for the functions of the Board, registration of professionals, delegation of powers, and power to make regulations, respectively. The court emphasized that SEBI has the requisite authority to regulate the working of Investment Advisors, including making provisions concerning fees to be charged by them.
Final Decision: The Petition was dismissed by the court, and no order as to costs was made.
JUDGMENT
S.C. Gupte, J. - Heard learned counsel for the Petitioner and learned counsel for Respondent No.1-Securities and Exchange Board of India ('SEBI') and for Respondent No.2-Union of India.
2. This Petition challenges constitutional validity and vires of Regulation 3(XII) of the Securities and Exchange Board of India (Investment Advisors) (Amendment) Regulations, 2020 ("Amendment Regulations"), by which Regulation 15A was inserted into the Securities and Exchange Board of India (Investment Advisors) Regulations, 2013 and Circular issued in pursuance thereof, being Circular Reference No.SEBI/HO/IMD/DF1/CIR/P/2020/ 182 dated 23.09.2020, providing for modes of charging fees to their clients by Investment Advisors. The challenge is on the footing of both want of legislative power in SEBI (by delegated authority) to make a provision such as regulation 15A or to issue a Circular such as Circular dated 23.09.2020 and breach of fundamental right of Investment Advisors to carry on a profession of their choice by enacting unreasonable restrictions.
3. In 2013, SEBI issued the Securities and Exchange Board of India (Investment Advisors) Regulations, 2013 for regulating the business of Investment Advisors. On 15.01.2020, SEBI circulated a consultation paper for revision of these original regulations amongst various stakeholders and interested parties. On 23.01.2020, the present Petitioner submitted its response to the consultation paper. On 17.02.2020, after taking into account the response received from various stakeholders to the consultation paper, a proposal was formulated and placed for consideration of the Board. The Board approved the proposal and issued the impugned amendment Regulations on 03.07.2020. The Petitioner challenges the Amendment Regulations to the extent that they introduce Regulation 15A into the original SEBI Regulations of 2013. Regulation 15A provides for fees to be charged by Investment Advisors and is in the following terms :-
"15A. Investment Advisor shall be entitled to charge fees for providing investment advice from a client in the manner as specified by the Board."
4. In pursuance of this Regulation, SEBI has issued a Circular dated 23.09.2020 titled as "Guidelines for Investment Advisors" inter alia providing for execution of Investment Advisor agreements with their clients by Investment Advisors containing terms and conditions provided in a Schedule annexed as Annexure-A to the Circular. The Circular also prescribes fees in pursuance of Regulation 15A of the amended Regulations. The Circular provides for charging of fees by Investment Advisors from their clients in either of the two modes which are set out below :-
" (A) Assets under Advice (AUA) mode
a. The maximum fees that may be charged under this mode shall not exceed 2.5 percent of AUA per annum per client across all services ofered by IA.
b. IA shall be required to demonstrate AUA with supporting documents like demat statements, unit statements etc. of the client.
c. Any portion of AUA held by the client under any preexisting distribution arrangement with any entity shall be deducted from AUA for the purpose of charging fee by the IA.
(B) Fixed fee mode
The maximum fees that may be charged under this mode shall not exceed INR 1,25,000 per annum per client across all services offered by IA."
The Circular also prescribes general conditions applicable to both modes in the following terms :-
"(B) General conditions under both modes
a. In case "family of client' is reckoned as a single client, the fee as referred above shall be charged per "family of client".
b. IA shall charge fees from a client under any one mode i.e. (A) or (B) on an annual basis. The change of mode shall be efected only after 12 months of on boarding/last change of mode.
c. If agreed by the client, IA may charge fees in advance. However, such advance shall not exceed fees for 2 quarters.
d. In the event of pre-mature termination of the IA services in terms of agreement, the client shall be re
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