SEBI’s Guidelines for Portfolio Managers to Step Up Performance Benchmarking -?
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Before We Go into The Subject of the New Guidelines by SEBI, Let Us Broadly Understand the Role of the Portfolio Manager!
WHO IS A PORTFOLIO MANAGER AND WHAT DOES IT DO?
- Who is a Portfolio Manager?
A portfolio manager is a body corporate who, pursuant to a contract or arrangement with a client, advises or directs, or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise), the management or administration of a portfolio of securities or the funds of the client.
- What is the difference between a discretionary portfolio manager and a non-discretionary portfolio manager?
The discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client.
The non-discretionary portfolio manager manages the funds in accordance with the directions of the client.
- What is the procedure for obtaining registration as a portfolio manager from 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 a demand draft drawn in favour of ‘ Securities and Exchange Board of India’
- What is the capital adequacy requirement of a portfolio manager?
The portfolio manager is required to have a minimum net worth of Rs. 2 crores.
- Is there any registration fee to be paid by the portfolio managers?
Yes. Every portfolio manager is required to pay Rs. 10 lakhs as registration fees at the time of grant of certificate of registration by SEBI.
- How long does the certificate of registration remain valid?
The certificate of registration remains valid for three years. The portfolio manager has to apply for renewal of its registration certificate to SEBI, 3 months before the expiry of the validity of the certificate if it wishes to continue as a registered portfolio manager.
- How much is the renewal fee to be paid by the portfolio manager?
The portfolio manager is required to pay Rs. 5 lakhs as renewal fees to SEBI.
- Is there any contract between the portfolio manager and its client?
Yes. The portfolio manager, before taking up an assignment of management of funds or portfolio of securities on behalf of the client, enters into an agreement in writing with the client, clearly defining the interrelationship and setting out their mutual rights, liabilities, and obligations relating to the management of funds or portfolio of securities, containing the details as specified in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.
- What fees can a portfolio manager charge from its clients for the services rendered by him?
SEBI Portfolio Manager Regulations have not prescribed any scale of a fee to be charged by the portfolio manager to its clients.
However, the regulations provide that the portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services.
- Is there any specified value of funds or securities below that a portfolio manager can’t accept from the client while opening the account for the purpose of rendering portfolio management service to the client?
The portfolio manager is required to accept a minimum of Rs. 5 lakhs or securities having a minimum worth of Rs. 5 lakhs from the client while opening the account for the purpose of rendering portfolio management service to the client.
A portfolio manager can only invest and not borrow on behalf of his clients.
- Are investors required to open Demat accounts for PMS services?
Yes. For investment in listed securities, an investor is required to open a Demat account in his/her own name.
- What kind of reports can the client expect from the portfolio manager?
The portfolio manager shall furnish periodically a report to the client, as agreed in the contract, but not exceeding a period of six months and as and when required by the client and such report shall contain the following details, namely: –
(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 the aggregate value of the portfolio as of the date of the report;
(b) transactions are undertaken during the period of the report including the date of the transaction and details of purchases and sales;
(c) beneficial interest received during that period in respect of interest, dividend, bonus shares, rights share, 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. The portfolio manager shall, in terms of the agreement with the client, also furnish to the client documents and information relating only to the management of a portfolio. The client has the right to obtain details of his portfolio from the portfolio managers.
- What is the disclosure mechanism of the portfolio managers to their clients?
The portfolio manager provides the client with the Disclosure Document at least two days prior to entering into an agreement with the client.
The Disclosure Document contains the quantum and manner of payment of fees payable by the client for each activity, portfolio risks, complete disclosures in respect of transactions with related parties, the performance of the portfolio manager, and the audited financial statements of the portfolio manager for the immediately preceding three years.
Please note 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.
- Does SEBI approve any of the services offered by portfolio managers?
No. SEBI does not approve any of the services offered by the Portfolio Manager. An investor has to invest in the services based on the terms and conditions laid out in the disclosure document and the agreement between the portfolio manager and the investor.
- Does SEBI approve the disclosure document of the portfolio manager?
The Disclosure Document is neither approved nor disapproved by SEBI. SEBI does not certify the accuracy or adequacy of the contents of the Disclosure Document.
- What are the rules governing the services of a Portfolio Manager?
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. However, 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.
- Is premature withdrawal of Funds/securities by an investor allowed?
The funds or securities can be withdrawn or taken back by the client before the maturity of the contract. However, the terms of the premature withdrawal would be as per the agreement between the client and the portfolio manager.
- Can a Portfolio Manager impose a lock-in on the investor?
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 an early exit, as laid down in the agreement.
- Can a Portfolio Manager offer indicative or guaranteed returns?
A portfolio manager cannot offer/ promise indicative or guaranteed returns to clients.
- On what basis is the performance of the portfolio manager calculated?
The performance of a discretionary portfolio manager is calculated using the weighted average method taking each individual category of investments for the immediately preceding three years and in such cases, the performance indicator is also disclosed.
- Where can an investor look out for information on portfolio managers?
Investors can log on to the website of SEBI www.sebi.gov.in for information on SEBI regulations and circulars pertaining to portfolio managers. The addresses of the registered portfolio managers are also available on the website.
- How can the investors redress their complaints?
Investors would find in the Disclosure Document the name, address, and telephone number of the investor relation officer of the portfolio manager who attends to the investor queries and complaints. The grievance redressal and dispute mechanism are also mentioned in the Disclosure Document. Investors can approach SEBI for the redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned portfolio manager and follows up with them.
Objective and Background Prior to Recent SEBI Guidelines
The SEBI (Portfolio Managers) Regulations, 1993 was last amended on February 10, 2012. Over a period, there has been a significant increase in the number of clients and assets under management (AUM) of the Portfolio Managers.
The data on the growth of the Portfolio Management industry since February 2012 is given below:
Subsequently, the Board Memorandum proposed to amend the SEBI (Portfolio Managers) Regulations, 2020 (“the PMS Regulations”) and the SEBI (Alternative Investment Funds) Regulations, 2012 (“the AIF Regulations”) to facilitate co-investment by investors of Alternative Investment Funds (AIF) through portfolio management route.
SEBI amends disclosure and benchmarking norms for portfolio managers:
The portfolio managers in India are not allowed to disclose any model portfolio returns or the performance of one or more cherry-picked portfolios in any communication to their clients. They are also required to disclose the relative performance of their investment approach in all the marketing material – 1) performance relative to the selected benchmark; and 2) performance relative to other portfolio managers within the selected strategy.
These new guidelines are as per the SEBI’s circular titled – ‘Performance Benchmarking and Reporting of Performance by Portfolio Managers’ dated December 16, 2022
In this circular, the regulator reviewed and proposed certain performance reporting and benchmarking norms to enhance transparency in the disclosures of portfolio management services firms (PMSes). The provisions of this circular will come into effect from April 01, 2023.
Benchmarking
For benchmarking purposes, SEBI mandates the Association of Portfolio Managers of India (APMI) to prescribe a maximum of three benchmarks for each strategy such as ‘equity’, ‘debt’, ‘hybrid’, and ‘multi-asset’. For each strategy, the portfolio manager must select one benchmark, which must reflect the core philosophy of the strategy.
Siddharth Vora – Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher said, “This is a great move by SEBI to create clear distinct categories of products and more transparency for clients by selecting appropriate benchmarks. This helps in reflecting the true performance of the strategy. For eg, a multi-asset or a hybrid strategy that is compared to equity benchmarks might grossly outperform in a bear market and underperform in a bull market, therefore misrepresenting the strategy performance. Having relevant benchmarks helps in the fair evaluation of the strategy. A hybrid fund manager’s true performance can be best observed by comparing it to a hybrid benchmark.”
The portfolio managers can choose to change the benchmark, if required, only after offering an option to subscribers to exit without any exit load. And the performance track record of the strategy prior to the change shall not be used by the manager for future reporting purposes.
Performance reporting
The PMS managers are required to disclose the time-weighted rate of return (TWRR), which excludes the impact of intermittent cash flows from subscriptions and redemptions on returns for each strategy. This is along with the trailing return disclosures of the selected benchmark. They also must present the extended internal rate of return (‘XIRR’) for each strategy that the investor invests in.
Since PMSes cater to individual investor requirements, the portfolio of one investor may not match that of others.
The effect of this must be explicitly communicated to the investor that the “performance of your portfolio may vary from that of other investors and that generated by the (same) investment approach implemented across all investors because of 1) the timing of inflows and outflows of funds; and 2) differences in the portfolio composition because of restrictions and other constraints,” as per the SEBI circular.
They are also required to disclose the relative performance – against the benchmark and other portfolio managers within the selected strategy – in all their marketing material.
Further, they must refrain from disclosing model portfolio returns and the performance of one or more cherry-picked investors in any communication with the clients. However, aggregated performance statistics can be used for aggregated performance reporting.
So far, the PMS managers are submitting monthly performance reports to the regulator, SEBI. Going forward, the managers are also required to submit the monthly reports to APMI in addition to SEBI within 7 working days from the end of each month. APMI will make available the monthly reports of the portfolio managers on its website in an intuitive and user-friendly manner facilitating ease of comparison.
Valuations
Coming to the valuation of the portfolio of debt and money market securities, the PMS managers have to follow the norms, which will be prescribed by APMI. The rules will be the same as the corresponding norms applicable to mutual funds.
APMI is required to impanel the valuation agencies for the purpose of providing security-level prices to portfolio managers. The portfolio managers shall mandatorily use valuation services obtained only from one or more of such impanelled valuation agencies.
CONCLUSION:
SEBI Cautions Public Against Unauthorized Money Mobilization by Entities Claiming to Provide Portfolio Management Services ……!
MUMBAI OCTOBER 2022 – SEBI cautions the public against unauthorized money mobilization by entities claiming to provide Portfolio Management Services
It has come to the notice of SEBI that some entities are collecting money from the public claiming to provide Portfolio Management Services. These entities have been luring the public, with a promise of high returns, through pamphlets and social media platforms. It is observed that in such schemes, the entities have been mobilizing money in relatively smaller amounts and promising assured returns. Some of the entities have names similar to that of SEBI-registered intermediaries, misleading the public, as though the fund raising is genuine and done by entities registered with SEBI.
SEBI, therefore, cautions investors not to fall prey to such unauthorized money collection. While investing in the securities market, investors are advised to deal only with SEBI-registered intermediaries. Further, SEBI-registered intermediaries including Portfolio Managers (who manage Portfolio Management Schemes) cannot offer products with assured or fixed returns on investment. Many such unauthorized schemes are run like Ponzi schemes without any real investment made in the securities market.
As per SEBI (Portfolio Managers) Regulations, 2020, a Portfolio Manager shall be a body corporate, registered with SEBI, and shall have a contract/agreement with a client to undertake management or administration of a portfolio of securities or funds of the client. Further, a Portfolio Manager cannot accept funds or securities worth less than rupees fifty lahks from the client and cannot promise any guaranteed or assured return, either directly or indirectly.
The public is advised to do proper due diligence before trusting their money in such unauthorized schemes.
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This blog has been collated and compiled by the internal staff of Karma Global with the knowledge and expertise that they possess, for its monthly newsletter Issue 07 of January 2023 in case of specific or general information or compliance updates for that matter, kindly reach out to
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