Today driven by the promise of higher
returns than the saving accounts or fixed deposits, most of the small and
retail investors are moving their investments under the guidance of Investment
Advisers.
“Investment Advisers” means any
person, who for consideration, is engaged in the business of providing
investment advice to clients or other persons or group of persons and includes
any person who holds out himself as an investment adviser, by whatever name
called.
Investment Advisers who make public
appearance or make recommendations or offer an opinion concerning securities or
public offers through public media while making recommendations through public
media are required to comply with the relevant applicable laws.
What is an Investment Advice: - “Investment
Advice” is an advice relating to investing in, purchasing, selling or
otherwise dealing in securities or investment products, and advice on
investment portfolio containing securities or investment products, whether
written, oral or through any other mean of communication for the benefit of the
client and shall include financial planning.
Failure to accomplish returns and
events like ponzi schemes, dubious high return schemes etc. have sharply
focused attention once again on fiduciary duties investment advisers owe to the
retail & small investors.
In 2013, to regulate the provision of
investment advisory services, SEBI (Investment Advisers) Regulations 2013 (“IA
Regulations”) was enacted where every person who acts as an investment
adviser to register itself under the IA Regulations unless the person is
exempted from the registrations under the IA Regulations which includes but not
limited to insurance agents, registered stock brokers etc.
Investment Advisers are the fiduciaries
and decision-making authority, on behalf and for the benefit of their customers
i.e. beneficiaries, and are subject to highest standard of care. The fiduciary
relations involve transfer of discretionary power and investment of funds on
behalf of the customers. Retail & small investors usually rely on
transactional decisions made by the Investment Advisers, as they attribute
significant value to the trust and good faith shared in such relationships.
Due to current technical and financial
nature of the market, the dependency of the retail & small investors has
grown large on their Investment Advisers which raise the question of
accountability & regulatory policy, as any fault on the part of the
Investment Adviser can impact or loose the hard-earned money of the retail and
small investors.
With the emergence of fintech based
Investment Advisers such as Robo Advisers, Discount Brokers, Online Financial
Advisers etc. have created a larger vacuum for the accountability, as they are
been viewed as specialist in providing services of an ‘execution only’ & do
not influence their clients’ decision making process.
Beside the registered Investment
Advisers, there are several companies which are neither registered nor approved
by SEBI or any other Regulatory Body, had come up like mushrooms in different parts
of India. They are giving their ‘so called expertise’ without having requisite
qualification & experience which results only in losing money by the retail
& small investors.
Few common frauds by the fraudulent
investment advisers:
a. Tips & Recommendation
Fraud: - One of the most widely used and most common fraud, where
the fraudulent investment adviser tries to attract the investors by convincing
them that they can provide a profit as much as 25% per month or double the
investment in a year or so. Also, they confirm the investors over 90% accuracy
on their tips & recommendation and claim to give more than 25%-30% monthly
return to their previous clients. And, to gain confidence of the clients, these
fraudulent investment advisers give 3 days’ trial period, where during the
trial period, results are 100% accurate. Seeing these trial period, the
investors subscribe to the recommendation plan of these fraudulent investment
advisers. Now let us see how these fraudulent investment advisers are able to
provide 100% accurate recommendations during the trial period. Suppose these
fraudulent investment advisers agree to give a trial period for 3 trading day.
That is, they agree to give 1 recommendation to buy or sell a stock for 3
trading day. But there is a hidden side to this scheme that the investors do
not know. During these 3 days, the fraudulent investment advisers don’t send
tips to just 1 person but to thousands of people.
i. Day1: On
day 1, this fraudulent investment adviser sends messages to sell a stock to 500
people and to buy to other 500 people for the same stock. Obviously, either the
stock will go up or go down (they generally choose a volatile stock so that the
probability of stock not changing price is zero). Therefore, on day 1, they
have sent a successful tip to 500 people. They, discard the other 500 people
for whom the tip didn’t worked.
ii. Day2: On
day two, they again send message to sell another stock to 250 people and buy
the stock to other 250 people. Obviously, again one group will receive correct
recommendation. They again discard the other group whom they sent wrong tip.
iii. Day3: On
last day of tip, they send buy suggestion to 125 people and sell suggestion to
other group of 125 people. Hence, 125 people will receive a correct tip for
three consecutive days.
Now, these 125 people will
now think that all the recommendations provided by these fraudulent investment
advisers for 3 continuous days are correct and most of the people out of 125
will subscribe to the tips and recommendation plan and become victim of one of
the most common fraud in Indian investment market. Soon, after subscribing to
the tips from these Investment Advisers, the investor starts losing money. The
tips aren’t working anymore. Overall, these people lose money apart from paying
a heavy registration fee for taking tips & recommendations.
b. Pump &
Dump:- Pump and Dump is a
micro-cap stock (penny stocks) fraud, where the investment advisers try to
inflate the price of these micro-cap stocks by providing misleading information
to investors. They try to increase the price of these penny stocks by giving
the fake news.
For example, If the
investment advisers want to increase the price of XYZ microcap stock, then they
will send messages like a big company is taking over a that stock; or that
micro-cap stock is giving a bonus of 1:1; or A large-cap is buying 50% stake of
that micro-cap stock etc.
The investment
advisers want the retail & small investors to buy the shares of
these stocks as much as possible. Let us see what the main aim of these
investment advisers is.
- First, these investment
advisers buy a cheap penny stock at a large volume.
- Then they send fake messages or
emails to millions of investors recommending them to buy that stock.
- Those who take this news as true,
start buying stocks of these companies.
- Because of this increased demand,
the price of that stock starts increasing.
- When the share price reaches a
good price, then these investment advisers sell their stocks and
get good returns.
After selling their
stocks at high prices, these investment advisers then stop sending
email/messages to the people. Moreover, the price of these stocks becomes very
volatile, as they are not worth that high price. Hence, soon the price of these
stocks falls heavily and the retail investors lose their money.
SEBI has time and again
taken action against Investment Advisers to protect the interest of small &
retails investors. Few of the leading cases are:
i. SEBI has issued
order against three illegal investment advisors –Rishabh Jain, Ubaidur Rahman
and G. Kadar Hussain. The trio has been alleged for a fraud of over INR 10 Cr
and SEBI has directed them to cease and desist from acting as an investment
advisor. The action comes after SEBI received an email complaint on December
18, 2015 from National Stock Exchange of India Ltd. (NSE). The trio lure small
and retail investors by promising assured monthly income with unbelievable
returns of 300-800% on buying and selling of securities based on the tips
provided by them.
ii. SEBI has imposed a
penalty of ₹10 lakh on two individuals- Mansoor Rafiq Khanda and
Firoz Rafiq Khanda for providing unregistered investment advisory services
through WhatsApp messages while promising guaranteed returns.
At present, hundreds of the
retail & small investors, have already lost their investments on false hope
& mirage shown by their Investment Advisers. They are still waiting for the
recovery of their dues.
Now the most important
question which arises before retail & small investors:-
Do the retail & small
investors who invest under the guidance of such Investment Advisers has any
legal right against any wrong/loss making advisory?
Under the present IA
Regulations and other applicable laws, the small and retail investors can
approach SEBI for recovering of its losses or they may move to Consumer
Disputes Redressal Commission (depending upon the facts of the dispute).
However, depending upon the nature of investment advisory, there are several
other legal recourses which can be initiated against such fraudulent investment
advisers.
To know further details
about investment frauds & for recovery of your investment from the
Investment Advisers, and for any other legal query, please connect with us
at admin@equicorplegal.com / +918448824659
Comments
Post a Comment