Regulatory Requirements for Portfolio Managers

Swetha Dhinesh

22 May, 2023

The process of managing a person’s investments to optimise their returns within a specific time frame. Additionally, these procedures ensure that investors’ capital is not overly exposed to market risk. Making a wise selection is the foundation of the entire process. For that, portfolio managers were appointed.

Portfolio managers usually take decisions to generate a successful investment mix, allocating resources in accordance with risk and financial objectives and diversifying assets to combat capital erosion.

Portfolio Manager

A portfolio is an investment collection, such as stocks, bonds, cash and cash equivalents, trade funds, closed-end funds, etc. Because managing a portfolio can be difficult and time-consuming, the investor hires a portfolio manager to handle it.

The primary responsibility of a portfolio manager is to manage an investor’s funds in a way that offers the investor the most advantages and a good return on investment. A portfolio manager is an entity legally that manages, advises, and oversees a portfolio on behalf of the client for a fee. Fund managers are another name for portfolio managers.

Before engaging in the requisite activities, the corporate body must register with SEBI as a portfolio manager per SEBI requirements. The SEBI (Portfolio Managers) Regulations contain the requirements. 

What Are The Guidelines Apply To A Portfolio Manager’s Services?

The contract between the portfolio manager and the investor governs the services of a portfolio manager. The minimum details required by the SEBI Portfolio Manager Regulations should be included in the agreement. However, the Portfolio Manager may include extra conditions in the client agreement. Therefore, it is recommended that an investor carefully study the agreement before signing it.

General Responsibilities of a Portfolio Manager

The non-discretionary portfolio manager shall manage the funds in accordance with the instructions of the client. In contrast, the discretionary portfolio manager shall manage the funds individually and independently in accordance with the needs of each client in a manner that does not partake in the character of a Mutual Fund.

The portfolio manager shall not accept securities or funds less than fifty lakh rupees from the customer. The minimum investment amount per client shall apply to both new clients and fresh investments from existing clients. Further, this minimum investment amount per client shall not apply to an accredited investor and to the Co-investment Portfolio Manager with the appropriate disclosures and in agreed terms.

Obligation and Responsibilities of Eligible Portfolio Managers

A qualified fund or portfolio manager shall be required to follow the obligation and responsibilities as mentioned in the regulation. They are as follows:

1. Abide by the rules outlined in Section 9A of the Income-tax Act of 1961 or any amendment, notification, clarification, or guideline issued thereunder. Section 9A mentioned that the fund management activity carried out by the eligible fund manager acting on behalf of such funds should not constitute a business connection, as mentioned in section 9A.
2. Provide advising, discretionary, non-discretionary services to qualifying investment funds, or a combination of these services.
3. Operate in line with the terms of the contract it has mutually agreed upon with the qualified investment funds. 
4. Give all relevant disclosures to qualified funds.
5. Funds and securities from each qualifying investment fund should be segregated.
6. Separate the money and assets of its other clients from the eligible investment funds.
7. Keep track of and keep its books and accounts separate from those relevant to its activities as a portfolio manager for other customers and qualified investment funds.
8. Appoint a custodian.
9. Maintain the funds of eligible investment funds in scheduled commercial banks.
10. Keep any other records that the Board may specify and disclose them to the Board as needed.
11. Give the Board quarterly reports at specified times.
12. Make sure that the Prevention of Money Laundering Act, 2002^[1] and the rules and regulations imposed under it are followed.
13. Comply with the rules outlined in these regulations and any subsequently published circulars or guidance by the Board.

What Does A Portfolio Manager Do?

A portfolio manager is a person who assists investors in choosing the finest investment strategies for future returns that are guaranteed. Let’s go through some of the roles and responsibilities of a portfolio manager:

• The ideal investment strategy for a client is determined by his or her income, age, and capacity for risk by a portfolio manager. Every person who earns a living must invest. One needs to set up a portion of their income in case of tough times. Unavoidable situations can occur anytime, so one needs to have enough money to deal with them.
• A portfolio manager is in charge of educating a client on the many investment options accessible on the capital market and the advantages of each plan. 
• A portfolio manager creates a unique set of investment options for each customer. Financial needs cannot be the same for every person. It is crucial that the portfolio manager first examine his client’s history. Know a person’s income and investing potential. 
• A portfolio manager needs to be up to date on the most recent financial market changes. Offer the client the best possible plan to yield the most money with the fewest risks. Make sure to comprehend the investment strategies and the dangers associated with each strategy in plain words.
• A portfolio manager must be open and honest with clients for a lasting relationship with the client.
• A portfolio manager must create investment plans for people that ensure the highest returns and benefits within a given time frame. The portfolio manager is responsible for advising the investor on where to invest and where not.

Registration Procedure and Net-Worth Requirement

• The Board shall send a notification to the applicant upon its determination that the applicant satisfies the requirements outlined in the regulation and upon receipt of the registration fees as outlined in the regulation.
• Net-Worth Requirement – The net worth mentioned per the regulation shall not be less than five crore rupees.
• With the caveat that a portfolio manager who received a certificate of registration before the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, went into effect must increase its net worth to at least five crore rupees within 36 months from the commencement of this regulation.
• Furthermore, the portfolio manager must satisfy the net-worth criteria under these laws separately and independently from the capital adequacy requirements, if any, for each activity it undertakes in accordance with the applicable legislation.
• For understanding, “net-worth” means the total value of paid-up equity capital plus free reserves (aside from reserves created through revaluation), less the total value of accumulated losses and deferred expenditures that have not been written off, including other expenses that have not been written off.

Conditions of Registration

The following conditions must be met in order for the certificate of registration issued under rule 10 to be valid:

• The portfolio manager must follow the Act and the regulations clearly.
• The portfolio manager shall acquire prior Board approval of any change in control in the manner that the Board may specify.
• If any information or details previously provided to the Board are discovered to be incorrect or misleading in any material respect, or if there has been a material change to the details previously provided, the portfolio manager shall promptly notify the Board in writing.
• The portfolio manager must pay the registration fees in accordance with the regulation.
• The portfolio manager must take appropriate action to address investor grievances within one month of the date the complaint was received and must keep the Board informed of the number, nature, and other specifics of complaints received.
• Throughout the duration of the certificate, the portfolio manager must constantly maintain the net worth stipulated in the regulation.

Conclusion

In India, portfolio managers must abide by some regulations that protect investors, promote transparency, and for the efficient functioning of the capital market. In order to maintain compliance with regulatory obligations, portfolio managers must stay updated with the latest regulations and guidelines. Failure to comply with the regulation may end in suspension, penalties or revocation of registration by market regulator SEBI.

Read Our Article: Reporting Requirements of Portfolio Managers