Ten common mistakes that result in escalation of SEBI Inspection - Essential guide for RA & IA
- CA Tarun Nagpal
- Jan 5
- 3 min read
Research Analyst ("RA") / Investment adviser ("IA") Inspections are essential part of SEBI operations to ensure regulatory checks and balances in intermediaries eco system.
Regulatory Provisions
Chapter IV of both SEBI IA Regulations, 2013 and SEBI RA Regulations, 2014 refer to regulations that give power to SEBI to inspect books of accounts, records and documents related to IA or RA.
Before Inspection SEBI may or may not serve notice of Inspection. In case, the notice to be served, SEBI will serve notice at least seven days before the inspection. But in the interest of investors, if board is satisfied, it may not serve notice before Inspection. In such case, it may give order in writing directing that affairs of RA / IA to be taken up for inspection.
Common Reasons for Inspection
To best our understanding, SEBI may take up case of RA/ IA for inspection under following circumstances
Repeated complaints over SCORE portal
Multiple complaints received by SEBI directly
Large number of clients being served
Large amount of fees getting credited in accounts
Random inspections
Generally, if any inspection happens on any RA/ IA, then such RA/IA is not taken for inspection again in a block of 3 year from the date of Inspection unless further complaints are reported against such RA/IA or there is a reason to believe that such inspection shall be in the interest of investors.
Understanding the Escalation level
Before we dive into mistakes that lead to inspection, it is important to understand there are escalation levels associated with Inspection. Any inspection starts with collecting data which sets the base of inspection and it also includes physical visit to registered office or place of business of RA/IA. Based on analysis of data collected, reply of final observations are asked for. In case, the reply to final observation is not satisfactory or violations are too many, than a meeting with Chief General Manager may be scheduled before escalation. Meeting with CGM is, generally, the last opportunity to explain. The meeting with CGM is case to case basis.
In case, the final observation replies or replies before CGM are not satisfactory, the Inspection may be escalation to Adjudication officer who then further investigate the matter. Post AO investigation & reply of SCN, order of closure, either by imposing penalty or warning, may be passed.
( Remember, a professional handling of Inspection by competent legal professional is absolute necessity as reply must be properly drafted in legal language)
Common Mistakes
The Inspection are escalated to AO level, when RA / IA make mistakes or do not have the competency to handle the inspection in a proper way. Following are the common mistakes which either worsen the Inspection or result in escalation
Not maintaining the basic books of accounts, records and documentation
Not replying to customer complaints promptly or within 21 days from date of complaint
Mis-selling of services and giving promises of return or account handling on records
Taking payment other than payment of RA or IA services - Most common
Unexplained employees i.e. employees who are off the records
giving incentives to sales or marketing employees - (Prohbited under regulations)
Significant mismatch in income reported in ITR vs RA/IA income ( leading to unexplained income)
Improper replies to queries leading to extension of scope of inspection. (not hiring legal professionals for filing replies)
Mis-behaving with Inspection officer and team and showing non cooperative attitude or falsifying/ hiding information (Cooperation does not mean letting them access laptops/ mobile without written notice)
Taking fee in other than official account like in family account or any other account.
We hope that this article gives you a clear idea that Inspection must be taken seriously as unprofessional way of handling inspection may lead to escalation and potential penal action.
(Compliacify Consulting has team of legal & Securities law experts who handle SEBI inspection. They act proactively and keep you posted at every level of Inspection. Get in touch for SEBI Inspection handling services)
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