SEBI Takes Action Against Scient Capital & DGS Capital

In a significant regulatory action, the Securities and Exchange Board of India (SEBI) has barred Scient Capital and DGS Capital Management from onboarding new clients and accepting additional investments from existing ones. This decision comes after both firms failed to maintain the mandatory net worth requirement of ₹5 crore for over two years, raising concerns about their financial stability and compliance with regulatory norms.

Violations and Misleading Disclosures

SEBI, in two separate interim orders issued on Monday, highlighted that both portfolio management firms had been operating below the required net worth threshold since January 15, 2023. Despite multiple opportunities to rectify the deficiency, neither firm took adequate steps to comply with regulations, prompting SEBI’s intervention.

Beyond failing to meet the financial requirement, Scient Capital reportedly submitted misleading compliance reports for FY23 and FY24, falsely declaring adherence to portfolio management regulations while failing to maintain the stipulated net worth. SEBI also noted that Scient Capital’s principal officer had not held the mandatory National Institute of Securities Markets (NISM) certification since September 2023, violating qualification norms for portfolio managers.

Similarly, DGS Capital Management failed to file key regulatory reports for both FY23 and FY24, including net worth certification, corporate governance disclosures, and compliance reports. Furthermore, its principal officer did not possess a valid NISM certification between September 7, 2023, and October 13, 2024, further exacerbating regulatory concerns.

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Investor Risks and Market Impact

SEBI emphasized that maintaining the minimum net worth is a continuous obligation for portfolio managers, as failure to do so may compromise investor interests. Portfolio management services involve handling substantial funds from high-net-worth individuals (HNIs), and firms failing to meet financial requirements could struggle with liquidity or operational inefficiencies, potentially putting investor funds at risk.

• As of December 2024, Scient Capital managed assets worth ₹66.8 crore across 86 clients.
• DGS Capital, despite regulatory non-compliance, saw its assets under management (AUM) more than double from ₹99.12 crore in January 2023 to ₹201.03 crore by December 2024.

The growth in DGS Capital’s AUM despite its financial non-compliance raises questions about regulatory oversight and investor awareness. Some industry experts speculate that investors may not have been fully informed about the firm’s regulatory shortcomings, highlighting the need for enhanced transparency and stricter enforcement.

SEBI’s Regulatory Response and Future Compliance

In light of these violations, SEBI has given both firms a 15-day deadline to meet the ₹5 crore net worth requirement. Until they achieve compliance, they are strictly prohibited from onboarding new clients or accepting further investments from their existing clientele.

This move aligns with SEBI’s broader efforts to strengthen regulatory oversight in India’s financial markets. Over the past few years, the regulator has intensified scrutiny of portfolio management services (PMS) providers, aiming to ensure they meet financial, operational, and ethical standards.

Market analysts believe that this enforcement action sends a strong message to portfolio managers about the importance of maintaining financial integrity. If firms continue to operate below the prescribed net worth threshold, it could lead to further enforcement actions, including the cancellation of licenses.

Looking ahead, investors are likely to be more cautious when choosing portfolio managers, paying closer attention to regulatory compliance. SEBI’s action also underscores the critical role of due diligence in the investment landscape, emphasizing that investors should verify a firm’s financial health and compliance status before entrusting their funds.

With stricter enforcement measures in place, industry experts anticipate that SEBI may introduce additional regulatory reforms to prevent similar breaches in the future. This could include more frequent audits, higher penalties for non-compliance, and enhanced investor protection mechanisms.

As the financial sector evolves, SEBI’s firm stance on compliance is expected to strengthen market confidence and improve the overall governance standards of portfolio management firms in India.