The Securities and Exchange Board of India (SEBI) has imposed a total penalty of ₹42 lakh on First Global Finance Pvt Ltd (FGF), its chairperson Devina Mehra and director Neeraj Khanna after finding that the portfolio management services (PMS) firm outsourced core investment-related functions to an external entity in violation of regulatory norms. SEBI levied a penalty of ₹14 lakh each on the company, Ms Mehra, and Mr Khanna, and also restrained First Global Finance from onboarding new PMS clients for 21 days.
In
an order, N Murugan, chief general manager (CGM) of SEBI, says, “...the material on record establishes inconsistencies in the manner in which portfolio performance was presented by FGF through factsheets, presentations and investor communications by prominently disseminating compounded annual growth rate (CAGR)-based performance figures and total return comparisons, despite using time-weighted rate of return (TWRR) while reporting to SEBI, resulting in misleading impressions regarding comparative portfolio performance and therefore not being fully fair, balanced and transparent in the context of investor communications disseminated by a regulated intermediary. Accordingly, FGF violated Regulation 22(10) of the PMS Regulations and Clauses 4.5.2.1, 4.5.3.4 and 5.6.1 of the Master Circular and Clause 1, 3 and 13(a) of Schedule III of Code of Conduct read with Regulation 21 of SEBI (Portfolio Managers) Regulations, 2020.”
“I further find that the material on record establishes that noticees nos2 and 3, namely Devina Mehra and Neeraj Khanna, were directly involved in and aware of the operational arrangement with Algo One AI Pvt Ltd and (its representative) Achin Agarwal, including the inclusion of Mr Agarwal in the investment committee, approval and implementation-related processes concerning basket files and various communications relating to portfolio allocation and execution workflows. The material further reflects that basket files generated through the Algo One system were subject to approval by Ms Mehra and Mr Khanna prior to execution. In view of the same, I find that the violations established were committed with their knowledge and involvement and accordingly, Ms Mehra and Mr Khanna are also liable for the violations established against FGF under the applicable provisions of the SEBI Act, 1992 and the PMS Regulations,” the SEBI order says.
The 88-page final order follows a SEBI inspection conducted in December 2022 and a forensic audit by Chokshi & Chokshi LLP covering the period from April 2021 to December 2023.
At the centre of the case was First Global Finance’s arrangement with Algo One and its representative Mr Agarwal. SEBI concluded that the external entity was deeply involved in core PMS operations, including investment decision-making and execution processes, despite regulations prohibiting the outsourcing of such functions.
According to the regulator, Mr Agarwal was formally inducted into First Global’s investment committee through a board resolution passed on 31 March 2020. The committee was authorised to take all investment-related decisions for PMS clients.
First Global argued that Mr Agarwal acted only as a technical consultant, explaining software tools and quantitative systems. However, SEBI rejected the defence, observing that the board resolution did not limit his role to technology support or describe him merely as a technical adviser.
The regulator held that the participation of an external person in an investment committee responsible for finalising model portfolios constituted direct involvement in investment decisions, thereby violating Regulation 24(10) of the SEBI (Portfolio Managers) Regulations, 2020.
SEBI also examined how trades were executed for PMS clients. The order noted that Algo One generated ‘basket files’ containing security names, trade quantities, buy-sell instructions, client codes and execution details. These instructions were reportedly implemented by First Global with little or no modification.
While the PMS firm maintained that the basket files were merely operational tools used after investment decisions had already been taken internally, SEBI disagreed. The regulator clarified that investment decisions are not restricted to stock selection alone, but also include trade timing, quantities, sector allocations, sequencing, and client-specific restrictions.
According to SEBI, once external entities become involved in such decision-making or execution-related processes, the arrangement crosses the line from technology support into outsourcing of core PMS activities.
The regulator also flagged the commercial arrangement between the two entities. According to the findings, Algo One allegedly received 20% of First Global’s net management fees and 45% of performance fees.
SEBI viewed the revenue-sharing structure as a further indication that Algo One’s role went far beyond a standard vendor or software-support relationship.
Apart from concerns about outsourcing, the regulator also found fault with First Global’s marketing practices. The order stated that the company projected itself as having sophisticated artificial intelligence (AI) and machine-learning investment capabilities without adequately disclosing the extent of third-party involvement.
SEBI additionally raised concerns over comparative performance advertisements and inconsistencies in performance-reporting methodologies, including the use of CAGR (compounded annual growth rate) and TWRR (time-weighted rate of return) metrics.
First Global defended its practices by stating that its performance data was genuine and that AI-driven systems formed part of legitimate quantitative investment processes used globally in modern asset management.
However, SEBI drew a distinction between the use of technology tools and the delegation of regulated investment functions to outside entities.
The order is expected to have wider implications for PMS firms and investment managers increasingly using AI-based systems and external technology providers in portfolio management operations.
First Global's lawyer said the company plans to challenge the order before the securities appellate tribunal (SAT).
