Portfolio Management Services Regulations SEBI

Portfolio Management Services or PMS is regulated by the Securities and Exchanges Board of India. Thus, the portfolio management services regulations SEBI are announced by the regulatory body to keep the markets free of fraudulent and malpractices.

PMS is the assistance of an investment expert in building and maintaining a financial portfolio. The fund manager provides advice and acts to reduce losses and maximize profits.

Also, read Why Do You Need Portfolio Management? and How Does a PMS House Function?

Want to know about PMS Features, meaning of PMS, and anything else about PMS, then read PMS Review.

Since SEBI is the Indian stock market’s regulatory body, it also regulates this aspect of trading. These regulations are regularly updated to enhance transparency in the sector and maintain the industry’s attractiveness.

Also, read How to Create Portfolio Like Warren Buffett?

Before getting into PMS SEBI Regulation, know about How Can An Investor Invest In Portfolio Management Services? and reap the benefits.

SEBI came out with SEBI (Portfolio Managers) Regulations, 1993, to set minimum criteria for being an investor and manager in the PMS industry.

Let’s discuss these regulations in more detail.

SEBI Portfolio Managers Regulations 1993

Before 1993, Portfolio Management Services was an unregulated activity. But as the service started gaining popularity, SEBI felt the need to introduce regulations in this field to enhance the security of investor’s capital and the answerability of the fund manager.

Thus, on 7th January 1993, SEBI laid out the guidelines for PMS. With the introduction of these regulations, the industry of Portfolio Management was formalized. As the industry grew, the rules and regulations governing it also got updated with time.

Multiple amendments from 1993 to 2020 were made to meet the changing times.

Many parts of the original document of regulations were omitted with the introduction of Securities (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.

Unlike 2020, a lot of points were different due to the technical inaccessibility and dependency on paperwork. Some of these regulations existent in 1993 are:

• The performance of a discretionary portfolio manager was calculated using the ‘weighted average method.’ This method took every category individually for the preceding three years.

This method’s drawback was that it failed to consider the holding periods of varied securities.

• A standardized method of calculating the performance was missing then. A new way has been introduced in 2020 – Time-Weighted Rate of Return (TWRR).
• The portfolio manager had to provide the Disclosure Document 2 days before entering an agreement with the client. The requirement of doing this two days before signing the deal has been removed.
• Earlier, submitting a copy of a disclosure copy with SEBI was mandatory.
• Multiple documents twice a year were submitted by the fund managers. Now, they have been eased.
• With the intent to decrease intermediaries, direct onboarding has recently been allowed for the managers.

With the growth of the PMS industry, introducing Portfolio Management Services Regulations SEBI was necessary.

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SEBI Regulations for Portfolio Management Services

Considering PMS Investment Risk, SEBI introduced many regulations for the Portfolio Management Services industry to retail investors. Some of the Importance of portfolio management regulations SEBI are

• SEBI does not approve of any services related to portfolio management. The investor enters into an agreement laid in front of him.
• The PMS minimum investment threshold for an investor or trader has been set at ₹50 lakh.
• The two parties sign a well-detailed agreement, clearly defining the relationship, liabilities, mutual rights, and obligations about fund and portfolio management.
• A regular report of the investment is sent to the investor by the manager. 
• The client fills a disclosure document for specifying the manner of payment of fees, every activity, etc.
• Investors can get their complaints redressed by the investor relations officer. The details of contact are mentioned in the disclosure document.
• The fee of the investment manager is not paid upfront. It should be paid at regular intervals until the investment is not withdrawn.

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SEBI Guidelines for Portfolio Manager

A portfolio manager is bound by guidelines of the SEBI to avoid harassment of the investor or trader. These guidelines are briefly discussed below:

• Charges – No upfront payment is asked from the client and all the necessary charges are to be clearly mentioned in the agreement signed.
• Direct On-Boarding – A client should be given the option to choose direct on-boarding by the service provider. This option would exclude the involvement of an intermediary.
• ‘Investment Approach’ – The term Investment Approach has been universalized for easy understanding. It should be the same for all the portfolio managers and should include some basic information like –
  • Investment objective
  • Appropriate benchmarks
  • Risks associated
  • Salient features, etc.
• Periodic Reporting – The client must be reported about the investments on regular intervals.
• Performance Reporting – Every portfolio manager has to report the performance of the various investments to the client. This phenomenon increases the transparency of the investment.

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Portfolio Manager Requirements

To become a portfolio manager, one needs to fulfill a few criteria. Some of these mandatory requirements are as follows:

• Portfolio managers must be registered with SEBI.
• The registration certificate for a portfolio manager is valid for three years.
• The net worth requirement for an investment advisor is ₹50 lakhs.
• The net worth requirement for a fund manager is ₹5 crores.

Now as per the PMS SEBI rule, the minimum investment has changed from ₹25 lakhs to ₹50 lakhs in PMS Registration.

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PMS Demat Account

As the fund manager manages your financial segments, he’ll require a Demat account for the same. Demat account is the necessary prerequisite for trading in the stock market.

The SEBI mandated this account by the Depository Act, 1996.

A lot of people think that the Demat account is not in their name. But this is not the case.

The fund manager might manage the Demat account, but it is opened in the client’s name. The client’s fund manager is trusted to hand over his capital and Demat account for trading on his behalf.   

So, learn how to use Demat account effectively and offer the top-class portfolio management services to your client.

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PMS Agreement

The agreement signed between the two parties – Investor and Fund manager is a very detailed document and is agreed upon before any investment-related exchange between the two.

Some of the necessary details to be included in the agreement are

• Both the parties agree to the agreement clauses.
• Premature withdrawal of the funds takes place following the agreement signed.
• No lock-in can be imposed on the investors by the investment managers.
• The rules of portfolio management service are based on the agreement between the manager and the investor. However, the minimum criteria set by SEBI are to be followed.
• The fee to be charged by the fund manager is either a fixed amount or proportionate to the returns. This point is mentioned in the agreement.

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Conclusion

The portfolio management services regulations SEBI are unambiguous and straightforward. 

The process of portfolio management is not approved by the regulatory body but is under its purview. This purview means a minimum eligibility criterion for investors and managers is in place to reduce fraudulent practices.

The first time SEBI regulated the PMS industry was in 1993, and these regulations have been updated time and again to keep up with the technological and temporal advancements.

A list of prerequisites has been set for becoming a fund manager, and these are mandatory. After an individual fulfills them, SEBI provides a certificate to him/her. This certificate is the green light to start managing portfolios for clients in the market.

The details of the handover are agreed upon by both the parties – investor and manager. From the minutest detail to the most superficial detail, every aspect of the deal is included.

The Demat account used by the fund manager to trade on behalf of the investor or trader is owned by the investor himself.

We hope the regulations by SEBI are crystal clear to you.

Happy trading!

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