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Work Mechanism between Portfolio Managers and Their Clients

Narendra Kumar

| Updated: Apr 30, 2018 | Category: SEBI Registration

Portfolio Managers

Portfolio Managers are experts authorized by the Securities Exchange Board of India to manage and administer investment[1] portfolios on behalf of their clients. The portfolio manager is only qualified to invest on behalf of their clients and not borrow from them.

All the activities of the Portfolio managers are regulated by the SEBI(PORTFOLIO MANAGERS) REGULATIONS, 1993.

Contractual Relationship

The relationship between the Portfolio Managers and the client is contractual in nature.

When they enter into an agreement a formal written agreement is drafted describing all the terms and conditions of the contract in detail including both party’s mutual rights, liabilities, and obligations in relation to the management of funds or portfolio of securities. Such an agreement shall mention all the required details mentioned in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.

One of the curial points to be mentioned is that the Portfolio manager cannot offer or promise any guaranteed returns to their clients.

Once everything is finalized the funds provided by the client to the portfolio manager must be transferred to a separate account maintained in a scheduled commercial bank by him.

Contents of Agreement

The agreement executed between the portfolio manager its clients all contain the following information:

  • The objectives of the investment and along with that the services to be provided by the portfolio manager.
  • Types of securities and instruments and proportion of exposure
  • Areas of investment. In case, the client has imposed investment restrictions for any particular industry or security then such restrictions should also be mentioned in the contract.
  • Amount of investment made by the client.
  • Fee payable to the portfolio manager. This part will include the quantum and manner of fees payable
  • Tenure of the contract as well as terms of portfolio investments.
  • Terms relating to an early withdrawal of funds by the client or early termination of the contract.
  • Repayment Provisions at the end of the contract.
  • Disclosure of risk involved and reporting mechanism
  • Who will have custody of securities
  • Any other terms of portfolio investment subject to SEBI Regulations.

Minimum Investment Amount

While opting for Portfolio management services, the investor is required to make an investment or accept securities of a minimum amount of 25 lakh rupees.

While rendering portfolio management service to clients, the portfolio manager cannot accept funds less than 25 lakh rupees or securities having a minimum worth of Rs. 25 lakhs.

 Currently, this limit is set at 25 lakh rupees. However, the Securities and Exchange Board of India (Sebi) is intending to realign the Portfolio Management Services with Alternative Investment Funds (AIF). Currently, the minimum investment requirement in AIF is One Crore rupees.

For this purpose, SEBI is planning to quadruple the minimum investment amount limit set for portfolio management services (PMS).

The main objective of this step is to make the portfolio management facility more inaccessible to small and medium level investors, given the high degree of risks involved in it.

Fees

The fees charged by a portfolio manager for rendering portfolio management services (either directly or indirectly) will depend upon the clause of their agreement. The number of fees can be:

  • Fixed amount
  • Return or activity-based fees or
  • A combination of both.

It is to be stated in the contract that the fees so charged shall be free of any kind of guarantee.

Disclosure Mechanism between the Parties

When a portfolio manager enters into a contract with its clients, it is required to comply with certain disclosure requirements. These disclosure requirements will include:

  • Disclosure Document: Prior to the execution of an agreement with the client the portfolio manager is required to provide the client with the Disclosure Document at least two days in advance.

The document will contain the following information:

  1. Quantum and manner of payment of fees
  2. Risks involved in portfolio
  3. Full disclosures in respect of transactions with related parties
  4. Performance of the portfolio manager
  5. Audited financial statements of the portfolio manager of immediately preceding three years.

Contents of the above-stated Disclosure Document shall be certified by an independent chartered accountant.

A copy of the disclosure document shall be filed with the SEBI every six months or whenever there is any material change effected.

  • Periodical Reports: The portfolio manager is required to furnish a periodical report to its client. The terms of such report will be as decided by the parties and mentioned in the agreement. Usually, this report will include the following information:
  1. The composition of the portfolio including its’

–  Value of portfolio

–  Description of security

–  Number of securities

–  Value of every security forming part of the portfolio
– Cash balance and the aggregate value of the portfolio on the date of the said report.

  1. Every transaction did along with its date and other details.
  2. All the beneficial interest accrued during the period of the report including dividend, interest, bonus shares, rights shares, debentures, etc.
  3. All the expenses incurred
  4. Full disclosure of risk involved

This periodical report should also be made available on the portfolio manager’s official website.

Along with this report, the clients have the right to receive all the relevant documents and information.

Exit Provisions for Clients

It is important that the agreement between the portfolio manager and its clients is well-drafted. One of the important provisions to be considered is the exit provision.

No Lock-in Period: It is important to know that the portfolio manager cannot impose any kind of lock-in period of the portfolio investments made by their clients. However, this does not mean that they are free to walk off, as the portfolio manager has the right to impose an exit fee on their client and mention the same in the agreement.

Premature Withdrawal of Funds/securities is allowed:

The client is allowed to withdraw funds or securities even before the maturity of the contract. However, the premature withdrawal will be regulated by the terms of the agreement between the portfolio manager and the client.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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