SEBI Imposes Two-Year Market Ban On 4W Wealth Management And Directors, Orders Refund Of Rs12.83 Crore For Illegal Investment Advisory Services

In September 2023, SEBI issued an order against 4W Wealth Management and its directors (noticees) for operating without the necessary registration under Section 12(1) of the SEBI Act and the SEBI Investment Advisers Regulations, 2013 (IA Regulations).

The noticees collected Rs12.83 crore in fees from investors through accounts in Axis Bank, ICICI Bank, HDFC Bank, and State Bank of India without proper documentation to support the sources of these funds.

SEBI held that the company engaged in investment advisory services without registration, which is a violation of regulatory requirements. The directors admitted to providing these services which made it necessary to refund of the collected fees to clients.

Three directors, Bhensdadia, Chopda, and Parth Patel, challenged SEBI's order before the Securities Appellate Tribunal (SAT). On May 3, 2024, SAT allowed the appeal and instructed SEBI to reconsider the matter after hearing these directors. However, SEBI reiterated the need for compliance with regulatory norms.

SEBI's investigation included documents provided by Avenues (India) Pvt. Ltd., which supplied payment gateway services to 4W Wealth Management. The documents confirmed that payments received by the company were related to stock market advisory services, and the company was not registered as an investment advisor.

Under the IA Regulations, entities must fulfil specific criteria to obtain a certificate of registration as investment advisers. These include submitting Form A with the requisite fee, possessing appropriate qualifications and certifications, maintaining a minimum net worth, and adhering to disclosures, client risk profiling, and record-keeping standards.

4W Wealth Management and its directors violated Section 12(1) of the SEBI Act and Regulation 3(1) of the IA Regulations by acting as investment advisers without mandatory registration. The company was also dissolved in August 2018. However, the individual directors were held responsible for the non-compliance committed by the company, based on principles of vicarious liability. SEBI referred to the decision of the Delhi High Court in Commissioner of Income Tax (CIT) vs Vived Marketing Services (P) Ltd where it was held that any order against a non-existent company was invalid. However, this does not exempt the directors from their responsibilities, as they are individually accountable for the actions taken on behalf of the company.

Further, SEBI referred to the Supreme Court's decision in N Narayanan vs Adjudicating Officer, SEBI where the Supreme Court held that a company, being a legal entity, can only act through its directors, who must exercise their powers with utmost care, skill, and diligence.

The SEBI issued the following orders:

1. The directors must refund the fees collected from clients and publish a public notice in national and local newspapers detailing the refund process. They are required to complete the refund exercise within four months and deposit any remaining balances in an escrow account for one year before transferring to SEBI's Investors Protection and Education Fund.
2. The directors are prohibited from selling assets except for refund purposes, and banks are directed to allow debits only for refunds.
3. The directors are restrained from accessing the securities market and associating with any listed public company or SEBI-registered intermediary for two years.
4. The directors must file a completion report with SEBI, certified by an independent chartered accountant, detailing the refunds made.

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