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A Glance through some of the Frequently Asked Questions on Portfolio Managers

Ashish M. Shaji

| Updated: Jan 21, 2021 | Category: SEBI Registration

Frequently Asked Questions on Portfolio Managers

A Portfolio Manager is a body corporate which pursuant to a contract with a client, advises, directs, or undertakes on clients’ behalf the management or administration of a portfolio of securities or goods or funds of a client. In this article, we shall discuss some of the frequently asked questions on Portfolio Managers.

What is the difference between the discretionary portfolio management service and non-discretionary portfolio management service?

In the case of discretionary portfolio management service, the portfolio manager individually and independently manages the securities and funds of every client as per the requirements of the client.

In the case of non-discretionary portfolio management service, the portfolio manager the fund as per the directions of the client.

What is the procedure for making an application for gaining registration as a portfolio manager from the Securities and Exchange Board of India?

In order to get registration as a portfolio manager, the applicant is required to make an online application through the SEBI intermediaries’ portal with a non-refundable application fee of 1 lakh rupees through direct credit in the bank account of SEBI through one of the ways- NEFT/RTGS/IMPS or any other mode permitted by the Reserve Bank of India.

It may be noted that alternatively, the application fee can also be paid through a demand draft drawn in favour of SEBI, payable at Mumbai or at the place where the regional office is located.

An applicant desiring registration as a portfolio manager under the PMS regulations should file their applications in Form A on the online system at https://siportal.sebi.gov.in

 

What is the minimum requirement of net worth for a portfolio manager?

A Portfolio manager should have a minimum net worth of 5 crore rupees.

How much fees can portfolio managers charge from its clients for the services rendered by him?

As per SEBI (Portfolio Managers) Regulations, 2020[1], a portfolio manager should charge a fee according to the agreement with the client for rendering portfolio management services. The fee so charged shall be a fixed amount or a performance based amount, or a combination of both. However, no upfront fees would be charged by such manager directly or indirectly to clients.

The agreement between portfolio manager and the client will, interalia, also include the quantum and the way the fee is payable from the client for every activity for which service is rendered by the portfolio manager directly or indirectly.

What are the different securities where a Portfolio Manager can invest client’s funds?

Under the Discretionary Portfolio Management Service, Portfolio Managers shall invest client’s funds in the securities listed or traded on a recognized stock exchange, money market instruments, units of mutual funds through direct plan, and other securities.

Under the non-discretionary portfolio management service, Portfolio managers can invest up to 25% of the AUM of a client in unlisted securities, in addition to the securities permitted for discretionary portfolio management.

 Unlisted securities for investment by such managers will include units of Alternative Investment Funds, Real Estate Investment Trusts, Infrastructure Investment Trusts, debt securities, etc., that are not listed on any recognized stock exchange in India.

An Existing client of a Non-Discretionary portfolio management service who has already invested in certain unlisted securities desires to subscribe to the rights issue of such unlisted securities, which can result in a breach of the 25% limit. Is this permitted?

An active breach because of investor’s action, subsequent to corporate actions such as subscription to rights issue, that causes breach of 25% limit applicable to Non-Discretionary portfolios will be considered as non-compliance.

However, it may be noted that a passive breach because of corporate actions such as bonus with respect to the value of unlisted securities shall not be considered as non-compliance.

What is the minimum funds or securities value that can be accepted by the portfolio manager from the client when opening the PMS account?

A portfolio manager should accept minimum 50 lakhs rupees or securities having a minimum worth of 50 lakhs rupees from the client.

Is partial withdrawal of portfolio allowed for the existing clients of Portfolio Managers?

The client can withdraw partial amounts from his portfolio as per the terms of the agreement between the client and the manager. However, the investment value in the portfolio after such withdrawal will not be less than the minimum investment amount applicable.

How are the limits on the transactions executed through associates of portfolio managers applicable?

Transaction charges in a financial year through self or associates will be capped at 20% by value per associate per service. Such limits will apply separately for Demat services, custodian service, etc.

Moreover, any charges to self/associate will not be at rates beyond that what is paid to the non-associates providing the same service.

For example- in case of Broking services, the total amount which is paid to the associate stock broker should not be more than 20% of the total brokerage paid for trades on behalf of its clients during the year. 

If such managers use multiple stock brokers who are its associates, then transaction by each associate stock broker will be capped at 20% of the total brokerage paid for trades on clients’ behalf during the year.  

How is the performance of the Portfolio Manager calculated?

The performance of portfolio manager is calculated by using the time weighted rate of return method for the immediately preceding three years or period of operation, whichever is less.

SEBI’s Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/26 dated February 13, 2020, provides information ion reporting of performance by Portfolio managers and also a client reporting format. It includes information on the performance of the client account, portfolio manager, and the benchmark.

What type of reports can be expected from a Portfolio Manager by a client?

The Portfolio Manager will furnish periodically a report to the client according to the agreement but not more than a period of 3 months, and the report shall contain the following details:

  • The composition and the portfolio value, description about securities and goods, the number of securities, value of every security held in the portfolio, units of goods, the value of goods, cash balance, and aggregate value of the portfolio as on the report date;
  • The transactions undertaken during the period of report, including the transaction date and purchase and sales details;
  • The beneficial interest received during the period in the form of interest, dividend, bonus shares, etc.;
  • Expenses that is incurred in managing the client’s portfolio;
  • Details of the risk forseen by the manager and the risk associated with the securities recommended by the manager for investment or disinvestment;
  • Default in the payment of coupons or any other payment default in the underlying debt securities and downgrading to default rating by the rating agencies, if any;
  • Details of the commission paid to the distributor for a particular client.

What is the mechanism of disclosure of the portfolio managers to their clients?

A portfolio manager provides the client the disclosure document before entering into an agreement with the client.

The disclosure document has the quantum and manner of fee payment payable by the client for every activity, portfolio risks, complete disclosures in respect of transactions with related parties, the portfolio manager’s performance, and the audited financial statements of such manager of the immediately preceding three years.

Does the Securities Exchange Board of India approve of any services offered by the Portfolio Managers?

No, SEBI doesn’t approve of any of the services offered by portfolio managers. An investor is required to invest in services based on the terms and conditions laid out in the disclosure document and the agreement between such a manager and the investor.

Does SEBI approve of the disclosure document of the portfolio manager?

No, SEBI don’t certify the accuracy of the contents of such a document.

What rules govern the services of a Portfolio Manager?

The services of such manager are governed by the agreement between the manager and the investor. The agreement is required to cover the minimum details as mentioned in the SEBI PM Regulations. However, additional requirement may be specified by the manager in the agreement. Therefore, an investor is hereby advised to read the agreement carefully before signing it.

Where an investor can find the information in Portfolio Managers?

If investors wish to get information on SEBI regulations and circulars pertaining to the same, they may log on to the SEBI website. Addresses of the registered managers can also be found there. Information on monthly reports can also be accessed.

Where can investors file their complaints?

Investors can find the name, address, number of the investor relation officer in the disclosure document. The grievance redressal and dispute mechanism is also specified in the disclosure document. Where there is a non-redressal of complaint, investors may approach SEBI for redressal of their complaints.

They can file their complaint through SCORES (SEBI Complaints Redressal System).

Conclusion

This detailed set of FAQs on Portfolio managers were released by the Securities and Exchange Board of India on October 28 last year.

Read our article:Portfolio Management Services- A Budding Business

Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

Business Plan Consultant


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