Smallcase may face heavy blow from Sebi settlement order on research analysts

  • Sebi imposed a settlement amount of 28.6 lakh on Amit Jeswani, a Sebi-registered research analyst and proprietor of a firm called Stallion Asset

Sebi-registered research analysts cannot offer model portfolios or offer advisory services, according to the terms of a settlement order passed by Sebi on 6th May 2022. In it, Sebi imposed a settlement amount of 28.6 lakh on Amit Jeswani, a Sebi-registered research analyst and proprietor of a firm called Stallion Asset. The settlement order is likely to impact Smallcase, a platform that offers curated portfolios to investors created by research analysts as well as investment advisors. Windmill Capital, a research analyst firm affiliated with Smallcase which provides such portfolios also has a research analyst licence.
According to the settlement order, Sebi issued a show-cause notice to Jeswani on 4th May 2021. In it, the regulator stated that “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.” The show cause notice further added 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.” Following the show cause notice, Jeswani applied for a settlement on 27th October without admitting or denying the findings of fact or the conclusion of law. The regulator then passed a settlement order for an amount of 28.6 lakh and also restrained Jeswani from obtaining any other registration under Sebi for a period of 3 years.
Sandeep Parekh, Managing Partner, Finsec Law Advisors came out strongly against the Sebi order. In a series of tweets, Parekh said that offering model portfolios is within the legal definition of what a research analyst can do. Furthermore there is no evidence to show that Jeswani has been dishonest or sloppy and non-diligent. “The only problem which appears is that he has spoken of providing ‘advisory services’ on calls with clients. Which doesn’t seem to be an ethical violation or a regulatory violation. Yes it is mis-labelling the service,” Parekh tweeted. “The order imposes a massive 28.6 lakh rupees settlement amount and also a bar from applying for any licence for the next three years. This is improper for two reasons. One, because Jesani has breached no law. Two, more importantly, it will introduce a chill in people providing honest regulated services. It is also worrying that the regulator has chosen to go after a case like this while literally tens of thousands provide unregulated ‘stock tips’ in social media which are dishonest,” he added.
“Smallcase offers investors the ability to customise portfolios and hence the model is quite different from what seems to have been practiced with Stallion Asset. The show cause notice was also in response to advisory services which is different from just offering model portfolios. Sebi has been regularly sounded out and appraised on the methodology of Smallcase and there has been no objection from the regulator,” said a person with knowledge of the matter who declined to be named.
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