A portfolio manager is a body corporate who pursuant to a contract or arrangement with a client, advises, directs or undertakes on behalf of the client (whether as a discretionary portfolio manager), the management of a portfolio of securities or the funds of the client. Generally, there are two kinds portfolio managers namely discretionary portfolio manager and non-discretionary portfolio manager. The discretionary portfolio manager separately and independently manages the funds of each client in accordance with the needs of the client. On the other hand, the non-discretionary portfolio manager manages the funds in accordance with the directions of the client itself. A cap of capital adequacy requirement of a portfolio manager is a must and the same must be maintained anyhow. The portfolio manager is required to have a minimum net worth of Rs. 2 crore. There is a requirement of registration fee which is to be paid by the portfolio managers. Every portfolio manager is required to pay Rs. 10 lakhs as registration fees at the time of grant of certificate of registration by SEBI.
For registration as a portfolio manager, an applicant is required to pay a non-refundable application fee of Rs.1,00,000/- by way of demand draft drawn in favor of ‘Securities and Exchange Board of India’, payable at Mumbai. The application in Form A along with additional information (Form A and additional information available on SEBI Website : www.sebi.gov.in.) submitted to the at the below mentioned address Investment Management Department – Division of Funds- 1 Securities and Exchange Board of India SEBI Bhavan, 3rd Floor A Wing, Plot No. C4-A, ‘G’ Block, Bandra-Kurla Complex, Bandra (E), Mumbai – 400 051.
It is pertinent to mention the recent update with respect to the informal circular issued by SEBI through an interpretative letter providing clarification to a Portfolio Manager (PM) rendering incidental investment advice to its clients. They are exempted to obtain registration as an Investment Adviser (IA) but are obliged to comply with the general obligations and responsibilities of the IA Regulations only to such clients that satisfy the minimum investment criteria under PM Regulations.
Fees chargeable by Portfolio Manager from its Clients
In this matter, the SEBI Portfolio Manager Regulations has not prescribed any scale of fee to be charged by the portfolio manager to its clients. However, the regulations provide that the portfolio manager should charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged must be a fixed amount or a return based fee or a combination. The portfolio manager must take specific prior permission from the client for charging such fees for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is outsourced).
DISCLOSURE MECHANISM OF THE PORTFOLIO MANAGERS
The disclosure mechanism clause is not very complex towards the clients which is a plus point. The portfolio manager provides to the client the Disclosure Document at least two days prior to entering into an agreement with the client. This Disclosure Document contains the quantum and manner of payment of fees payable by the client for each activity, the portfolio risks, complete disclosures in respect of the transactions with respective related parties, the performance of the portfolio manager and the audited financial statements of the portfolio manager for the immediately preceding three years. Also, it is pertinent to mention that the disclosure document is neither approved nor disapproved by SEBI nor does SEBI certify the accuracy or adequacy of the contents of the Documents.
Moreover , the services of a Portfolio Manager are governed by the agreement between the portfolio manager and the investor. The agreement should cover the minimum details as specified in the SEBI Portfolio Manager Regulations. Apart from this, additional requirements can be specified by the Portfolio Manager in the agreement with the client. Hence, an investor is advised to read the agreement carefully before signing it.
KINDS OF REPORTS EXPECTED FROM THE PORTFOLIO MANAGER
As per the recent informal circular by SEBI, the portfolio manager shall periodically furnish a report to the client(s), as agreed in the contract, but not exceeding a period of six months and as and when required by the client. Such report must contain the following details as follows:-
(a) the composition and the value of the portfolio, description of security, number of securities, value of each security held in the portfolio, cash balance and aggregate value of the portfolio as on the date of report;
(b) transactions undertaken during the period of report including date of transaction and details of purchases and sales;
(c) beneficial interest received during that period in respect of interest, dividend, bonus shares, rights shares and debentures;
(d) expenses incurred in managing the portfolio of the client;
(e) details of risk foreseen by the portfolio manager and the risk relating to the securities recommended by the portfolio manager for investment or disinvestment.
This report may also be available on the website with restricted access to each client as per the circular. The portfolio manager must furnish all the relevant documents and information relating only to the management of a portfolio as per the agreement between the manager and the client thereof. The client has the right to obtain details of his portfolio from the portfolio managers at any given time.
HOW CAN THE INVESTORS REDRESS THEIR COMPLAINTS?
All the clauses and the redressal mechanisms must be mentioned in the disclosure agreement. The investors would find in the disclosure document the name, address and telephone number of the investor relation officer of the portfolio manager who will be attending to the investor queries and complaints. Moreover, the grievance redressal and dispute mechanism is also mentioned in this document itself. Apart from this, investors can approach SEBI for redressal of their complaints. On receipt of such complaints, SEBI will take up the matter with the concerned portfolio manager and follow up with them. Investors can send their complaints to at the head office as well.
Moreover, investors can log on to the website of SEBI www.sebi.gov.in for information on SEBI regulations and circulars pertaining to portfolio managers. Addresses of the registered portfolio managers are also available on the website. The performance of a discretionary portfolio manager is calculated using weighted average method taking each individual category of investments for the immediately preceding three years and in such cases performance indicator is also disclosed. Also, the Portfolio managers cannot impose a lock-in on the investment of their clients. However, a portfolio manager can charge exit fees from the client for early exit, as laid down in the agreement.
CONCLUSION
Recently, SEBI under the interpretative request letter read with Informal Guidance analyzed the SEBI IA Regulations and the PM Regulations. It briefly talked about evaluation of registration and permissible activities undertaken by an eligible PM or a fund manager in relation to incidental advisory services to its clients. The fund manager of the AIF is also exempted from separate registration under IA Regulations for rendering investment or any incidental investment advice to its clients. Hence, the compliance provision concerning IA Regulations are inapplicable to the PM. Even though the PM is exempted from the IA registration, he/she is required to comply with general obligation and responsibilities of the IA Regulations. Moreover, in rendering incidental advisory services to the clients, PM must obligate to ensure that the minimum investment threshold of INR 5 million is satisfied as per PM Regulations.