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.
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
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.
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.
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.
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.
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.
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
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.
common frauds by the fraudulent investment advisers:
& 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.
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.
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.
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.
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
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.
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.
has time and again taken action against Investment Advisers to protect the
interest of small & retails investors. Few of the leading cases are:
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.
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.
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.
the most important question which arises before retail & small investors:-
the retail & small investors who invest under the guidance of such
Investment Advisers has any legal right against any wrong/loss making advisory?
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
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 firstname.lastname@example.org