The Union Budget 2019 presented by Honorable Finance Minister Mrs Nirmala Sitharaman has introd...
Portfolio Managers are experts authorized by the Securities Exchange Board of India to manage and administer investment 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.
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.
The agreement executed between the portfolio manager its clients all contain the following information:
Read Also: Requirements for Portfolio Manager Registration.
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.
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:
It is to be stated in the contract that the fees so charged shall be free of any kind of guarantee.
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:
The document will contain the following information:
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.
– 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.
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.
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.
See oour Recommendation: Difference Between Portfolio Management and Mutual Fund.