SEBI Penalises Portfolio Manager First Global, Directors For Outsourcing Core PMS Functions

The Securities and Exchange Board of India (SEBI) has imposed a cumulative penalty of Rs. 42 lakh on First Global Finance Pvt. Ltd., its Managing Director Devina Mehra, and Director Neeraj Khanna.

The regulator found that the firm invested client funds based on the advice of another entity, outsourced core portfolio management and investment-related activities, and disseminated misleading advertisements and exaggerated performance claims.

SEBI Chief General Manager N. Murugan passed the order in proceedings arising from an inspection and subsequent forensic audit of First Global's portfolio management operations.

“The cumulative effect of the aforesaid circumstances clearly demonstrates that Algo One and Mr. Achin Agarwal were not functioning merely as passive technology vendors or software support providers. Rather, this establishes substantive participation by another entity in the investment advisory, portfolio allocation and implementation process through which PMS client funds were invested.”

SEBI had conducted an on-site inspection of First Global's portfolio management activities between December 5 and 9, 2022. The inspection indicated possible outsourcing of core portfolio management and investment-related activities. A forensic audit was thereafter ordered for the period between April 1, 2021 and December 31, 2023 to examine the firm's operations involving Algo One AI Private Limited.

The regulator found that the arrangement extended beyond technological support. According to SEBI, it involved client portfolio management, generation of client-specific basket files, portfolio alignment activities, and investment execution processes. It also found that Achin Agarwal, associated with Algo One, was formally made part of First Global's Investment Committee despite not being its employee.

The noticees argued that all investment decisions were independently taken by First Global's Investment Committee. They said Algo One merely functioned as a technology consulting and analytics support provider, while Achin Agarwal's role was limited to explaining the Turbo system.

SEBI rejected these submissions. It held that Algo One's generation of client-specific basket files and participation in portfolio alignment activities amounted to substantive involvement in investment decision-making. It also noted that Algo One received 20% of management fees and 45% of performance fees, indicating that it was not merely a passive vendor.

Separately, SEBI held that First Global disseminated misleading advertisements containing exaggerated claims such as “the most advanced Artificial Intelligence and Machine Learning known to man” and “one of the most sophisticated quantitative investment engines in the world.”

Holding that Devina Mehra and Neeraj Khanna were not passive office-bearers disconnected from the impugned conduct, SEBI barred First Global from accepting new clients for 21 days from June 8.

It also directed the firm to cease outsourcing portfolio management and investment-related activities to third parties in violation of regulatory norms, remove misleading advertisements from the public domain, and imposed a penalty of Rs. 14 lakh each on the three noticees.