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There has always been a confusion on drawing a line between services which can be offered by Research Analysts and Investment Advisors. The confusion was in principle in offering Model Portfolio services. Who is permitted to provide the services, whether it is research analysts or investment advisers or both?

SEBI recently has alleged in its Settlement Order that,

“Applicant violated provisions of Regulation 2(u) read with clause 1, 2 & 8 of Schedule III of Code of Conduct prescribed under the RA Regulations, by selling model portfolio products to his clients / prospective clients, which is against the defined responsibility of Research Analyst. It was alleged that Applicant had not acted honestly and in good faith and had not ensured maintenance of appropriate standards of conduct and adherence to proper procedures”

So, firstly let’s understand what Model Portfolio means and what does SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014 mentions on what a Research Analyst can do.

Model Portfolio

Model Portfolio means a pack of securities with different allocations given to each of the securities in that packet. Here securities are not restricted to only equity shares but also to include mutual funds, derivatives, and other securities as well.

Generally, there would be multiple portfolios which an intermediary offer to its clients depending on the requirements of the client.

What a Research Analyst can do?

As per Regulation 2(u) of the SEBI (Research Analyst) Regulations, 2014, a research analyst means a person who is primarily responsible for:

i. preparation or publication of the content of the research report; or

ii. providing research report; or

iii. making ‘buy/sell/hold’ recommendation; or

iv. giving price target; or

v. offering an opinion concerning public offer,

with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’ and includes any other entities engaged in issuance of research report or research analysis.

Explanation: The term also includes any associated person who reports directly or indirectly to such a research analyst in connection with activities provided above;

In model portfolio, recommendation of buy/sell/hold is provided for a pack of securities and not for single security. Also, such type of recommendation would contain the features of an advice. Thereby, providing Model Portfolio services is outside the ambit of the Research Analyst regulations.

Schedule III of the said regulation mentions about the code of conduct to be followed. Clause 1, 2 and 8 of the said schedule are as follows:

Clause 1: Honesty and Good Faith

Research analyst or research entity shall act honestly and in good faith.

Clause 2: Diligence

Research analyst or research entity shall act with due skill, care and diligence and shall ensure that the research report is prepared after thorough analysis

Clause 8: Responsibility of senior management

The senior management of research analyst or research entity shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.

Thereby SEBI alleged that there is violation in the compliance of the code of conduct by the research analyst. A Research Analyst cannot provide recommendations for a portfolio containing securities and can only provide recommendation on standalone securities.

Who can provide Model Portfolio?

1. Investment Advisor

In my opinion, an Investment Advisor can provide Model Portfolio services as the same has been envisaged in SEBI (Investment Advisors) Regulations, 2013 as mentioned below:

“investment advice” means 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 means of communication for the benefit of the client and shall include financial planning

The term investment advice includes investment portfolio containing securities thereby by permitting Investment Advisor to provide Model Portfolio advice.

2. Portfolio Manager

In my opinion, a portfolio manger can provide Model Portfolio services as mentioned in the SEBI (Portfolio Managers) Regulations, 2020 as mentioned below:

“portfolio manager” means a body corporate, which pursuant to a contract with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or goods or funds of the client, as the case may be

As per the above mentioned definition, portfolio manager can manage portfolio of securities or funds. However, a minimum investment amount of Rs. 50 lakhs to be made by such clients.

Also, compliances under each of the above mentioned regulations to be followed by the registered intermediaries.

Conclusion

This order states that a Research Analyst cannot provide Model Portfolio services. Also, the services provided cannot be quoted as ‘advisory service’. This order does affect genuine intermediaries who are registered as Research Analysts and providing Model Portfolio services or curated portfolios. Model portfolios had gained a lot of attention from the investor community would also face difficulties in making an investment through this mechanism.

Also, there are platforms which facilitates to provide curated portfolio for the intermediaries. This would also undergo a change and the Research Analyst providing these services would be advisable to refrain from providing these services as this would lead to breach of regulation.

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

SETTLEMENT ORDER

(Application No. 6631/2021)

On the applications submitted by

Mr. Amit Mohan Jeswani (Proprietor of Stallion Asset) – Research

Analyst

(PAN: AHYPJ4788K)

Settlement Order No: SO/GR/BM/2022-23/6631

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had conducted the inspection of Mr. Amit Mohan Jeswani (Proprietor of Stallion Asset) (SEBI Research Analyst Registration no: INH000002582) (hereinafter referred to as the “Applicant”). The focus of the inspection was to look into the compliance with respect to the SEBI (Research Analysts) Regulations, 2014 and Circulars there under, on-boarding of clients, fees/charges, due diligence carried out by the Applicant, investor service/complaints redressal mechanism, Anti Money Laundering guidelines issued from time to time etc. The period of inspection was from April 01, 2018 to March 31, 2019 (hereinafter referred to as “Inspection period”). The said inspection was conducted during October 9, 2019 – October 11, 2019. The findings/ observations of the inspection report along with the relevant documents were communicated to the Applicant on January 21, 2020 and the Applicant replied to the said observations/ findings on January 30, 2020. Based on the aforesaid findings/observations and submissions of the Applicant, it was alleged that the Applicant violated the provisions of Regulation 2(u) and Regulation 24(2) read with clause 1, 2 & 8 of Schedule Ill of Code of Conduct prescribed under the SEBI (Research Analysts) Regulations, 2014 (hereinafter referred to as RA Regulations) and Regulation 3(1) of the SEBI (Investment Advisors) Regulations, 2013 read with Section 12(1) of the SEBI Act.

2. The undersigned was appointed as the Adjudicating Officer (hereinafter referred to as the “AO”) vide order dated December 10, 2020 (communicated vide communiqué dated December 15, 2020) to adjudicate upon the violations committed by the Applicant prima facie observed during the inspection under Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (Adjudication Rules) read with section 151 of the SEBI Act, 1992 and to impose penalty, if deemed fit, under the relevant provisions of the SEBI Act.

3. In this regard, a Show Cause Notice no. SEBI/HO/EAD/EAD4/P/OW/2021/ 0000009903/1 dated May 04, 2021 (hereinafter referred to as ‘SCN’) was issued to the applicant. Briefly, the following allegations were leveled against the applicant in the SCN:

a) It was observed that being a Research Analyst, the Applicant was selling model portfolio products to his clients / prospective clients which is against the defined responsibility of a Research Analyst as mentioned in RA Regulations and professional standards of Research Analyst. It was therefore alleged that the Applicant violated provisions of Regulation 2(u) read with clause 1, 2 & 8 of Schedule Ill of Code of Conduct prescribed under the RA Regulations, by selling model portfolio products to his clients / prospective clients, which is against the defined responsibility of Research Analyst. It was alleged that Applicant had not acted honestly and in good faith and had not ensured maintenance of appropriate standards of conduct and adherence to proper procedures.

b) Further, it was observed that the Applicant was not registered as an Investment Adviser with SEBI, however, from the call data records of the Applicant, wherein calls were made to client by the employees of the Applicant, it was observed that he was introduced to the clients as an entity providing ‘Advisory Services’. It was therefore alleged that the Applicant violated provisions of Regulation 24(2) read with clause 1, 2 & 8 of Schedule Ill of Code of Conduct under RA Regulations by not acting honestly and good faith and by not ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures as well as Regulation 3(1) of the SEBI (Investment Advisors) Regulations, 2013 read with section 12(1) of the SEBI Act.

4. Pending Adjudication Proceedings commenced by the aforesaid SCN, the Applicant proposed to settle the instant proceedings initiated against him, without admitting or denying the findings of fact and conclusions of law, through a settlement order and filed the settlement applications with SEBI having ref. no. 6631/2021 dated October 27, 2021 in terms of the provisions of SEBI (Settlement Proceedings) Regulations, 2018 (hereinafter referred to as ‘Settlement Regulations’).

5. Pursuant to the above mentioned settlement application filed by the Applicant, the meeting of the Internal Committee (hereinafter referred to as ‘IC’) held on February 22, 2022. During the aforesaid meetings, the settlement terms of Rs.28,60,000/-(Rupees Twenty-Eight Lakh Sixty Thousand only) was formulated by the IC for the applicant as settlement amount towards the alleged violations stated above. Thereafter, the Applicant vide email dated March 05, 2022, submitted the Revised Settlement Terms (RST) along with the revised calculation of Rs.20,15,000/- as the proposed settlement amount.

6. The settlement application was placed before the High Powered Advisory Committee (hereinafter referred to as ‘HPAC’) on March 17, 2022, and the HPAC, after considering the facts and circumstances of the case, settlement terms offered by the applicant and also the material made available before it by SEBI, recommended that the aforesaid adjudication proceedings initiated against the applicant may be settled on payment of Rs.28,60,000 towards the settlement terms. The HPAC also recommended imposition of a non-monetary settlement term of restraining the Applicant from obtaining any other registration with SEBI for a period of 3 years from the date of the settlement order. The Panel of Whole Time Members of SEBI approved the said recommendation of HPAC on April 06, 2022 and the same was communicated to the applicant vide email dated April 13, 2022.

7. Subsequently, vide mail dated May 02, 2022, the applicant informed about the remittance of the respective settlement fees by way of online transfer, the receipt of which amount was confirmed by the concerned department of SEBI on May 04, 2022. Also, vide the said email, the Applicant has informed of his acceptance of the aforementioned non-monetary terms.

8. In view of the above and in terms of Regulation 23 (1) of the Settlement Regulations, it is hereby ordered to dispose of the aforesaid adjudication proceedings initiated against the Applicant, Amit Mohan Jeswani (Proprietor of Stallion Asset) vide SCN ref.no. SEBI/HO/EAD/EAD4/P/OW/2021/ 0000009903/1 dated May 04, 2021.

9. This order is without prejudice to the right of SEBI to take enforcement actions, in terms of Regulation 28 of the Settlement Regulations, including restoring or initiating the proceedings in respect to which the settlement order was passed against the applicant, if:

a. any representations made by the applicant in the settlement proceedings is subsequently found to be untrue; or

b. the applicant breaches any of the clauses / conditions of undertakings/ waivers filed during the current settlement proceedings.

10. This settlement order is passed on the May 06, 2022 and shall come into force with immediate effect.

11. In terms of Regulation 25 of the Settlement Regulations, copies of this order are being sent to the applicant Amit Mohan Jeswani (Proprietor of Stallion Asset) and also to the Securities and Exchange Board of India.

Place: Mumbai

Date: May 06, 2022

G. RAMAR

ADJUDICATING OFFICER

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The contents of this document are solely for informational purpose and are prepared keeping in mind applicability of the provisions to our clients. It does not constitute professional advice or recommendation of firm. Neither the authors nor the firm accepts any liabilities for any loss or damage, of any kind arising out of any information in this document or for any actions taken in reliance thereon.

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I am a practising Chartered Accountant in the field of compliance and advisory services of SEBI registered intermediaries namely Investment Advisors, Research Analysts, Portfolio Managers, Alternate Investment Funds. Also, a functional consultant for the development of software applications for w View Full Profile

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