SEBI-registered research analysts, investment advisors face new threat of identity theft. What's the way out?

When the regulator follows up with the registered entity, the RA or RIA may not even have been aware that such a fraud has been committed.

Research analysts and investment advisors registered with the Securities and Exchange Board of India (SEBI) are now having to deal with fake profiles and imposters who are cheating investors by pretending to be—and then placing the legal and thus the financial burden on—these registered entities.

Legal experts told Moneycontrol that such cases are on the rise.

When investors are defrauded, they raise their complaints through SEBI's online redressal system, SCORES. This involves the investor choosing the registered entity's name and then giving the details of the fraud committed.

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The regulator then follows this up with the registered entity. In these cases of impersonation, the research analyst (RA) or registered investment advisor (RIA) in question is usually and not surprisingly not even aware of such an act being committed.

Moneycontrol spoke to a few legal experts to understand what registered entities can do to protect themselves in such cases.

File complaints, post alerts
Anand Kankani, a practising company secretary and who advises RAs and RIAs, said that an intermediary should immediately lodge a complaint with the cybercrime portal, notify SEBI and BSE Administration and Supervision Ltd (BASL), and inform all its clients about the same.

To inform clients, the intermediary can run a message on its website (if it has one) and also post on all its social media pages, such as on Twitter, Instagram and so on, "where they (the intermediaries) usually post matters pertaining to securities market" and through the social-media handles that RIAs are required to declare with SEBI. Kankani emphasised that this is a crucial step for investor protection and for safeguarding the intermediary from regulatory action.

The market regulator usually relies on the fact whether the intermediary registered a police complaint in the form of a first information report (FIR), said Kankani, and added that it is, therefore, advisable to lodge an FIR.

However, he agreed that if there are multiple such attempts to impersonate an intermediary, then it may not be practical to file an FIR for every attempt.

Some of RAS and RIAs have even reported multiple instances of such impersonations in a day.

Vinod Joseph, partner at Economic Laws Practice, suggested that when the frequency is high, an intermediary can taper out the number of FIRs filed.

That is, file for a certain number of them in the beginning and keep filing the complaints in fewer numbers as the frequency of fraud increases. This will show the regulator that there was an intent to correct this fraud. However, an FIR should be filed in every instance where the fraud appears to be substantial.

Is there collusion?

Joseph said that the regulator takes such stringent measures because there may be instances where the intermediary colluded with a third party to commit fraud. That is, the intermediary may allow a third party to use his/her name and take payment, and then the intermediary may be given a share of this payment.

"How would the regulator know if the intermediary was not acting in collusion with the overt perpetrators?" asked Joseph, who hence suggested the intermediary at least get FIRs filed for the first few instances. If an FIR is not possible, then the intermediary can register a complaint through a magistrate.

Kankani pointed out that the regulator has tried to separate the wheat from the chaff by proposing a separate portal through which investors can make their payment to the registered intermediaries. "This will help investors differentiate registered entities from unregistered entities who pretend to be registered," he said.

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He added that the regulator could also set up a platform in association with the Cyber Crime Portal, where investors and intermediaries can report fake social media handles and channels.

Red flags

Kankani also asked investors to look out for two red flags that should alert them to bad actors—one, they will ask the client to pay money in a bank account that does not belong to the intermediary; and two, they will promise assured returns that are often high and for a disproportionately small fee.