Regulation of Portfolio Management Services(Final Copy)

8/3/2019 Regulation of Portfolio Management Services(Final Copy)

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REGULATION OF PORTFOLIO MANAGEMENT SERVICES

Portfolio Management Service (PMS)

PMS is an arrangement under which a Resident Individual/Corporate/NRI enters into an

agreement with a Portfolio Manager to manage his/her/its funds/portfolio of securities.

The customer pays a fee to the Portfolio Manager for the services rendered as per the

terms of the agreement. 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 customer clearly defining the inter-se relationship 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.

PMS is more of a personalized service where the portfolio of each customer is managed

independently. Customers also have the option to customize their portfolio, as agreed

with Portfolio Manager.


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There are two variants of PMS:

Discretionary PMS: where the Portfolio Management has the absolute discretion

to choose the portfolio structure which it feels would best suit the investment

objective of the scheme/customer.

AND

Non-discretionary PMS: where the Portfolio Manager manages the

fund/securities of the customer in accordance with the directions of the customer.

Comparison with Mutual Fund

In both PMS and Mutual Fund, the funds are managed by professionals having

knowledge and experience using market analysis and research. The substantial

difference between the two is that PMS is personalized service where each customer

has a Portfolio account and is managed independently whereas the funds are

collectively managed in Mutual Fund.


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Advantages of choosing PMS instead of Mutual Funds:

Asset Allocation:

PMS helps in allocation of savings of a client in stocks, bonds or equity funds.

The plan is tailor made and is designed after detailed analysis of the client's saving

pattern, investment goals, and his/her risk taking capacity.

Timing:

Portfolio management service helps in allocating the right amount of money in

right type of savings plan at the right time. Portfolio managers provide their expert

advice to their client as to when to invest in equities or bonds and when to take

money out of a particular savings plan. They analyze the market trends and advice

their clients regarding the amount of cash to be taken out during big risks in stockmarket.

Flexibility:

Portfolio managers plan investments of clients according to their needs and

preferences. At times, portfolio managers can invest client's money according to

their own preferences since they know the market better than client. It is the

client's duty to provide his portfolio manager a level of flexibility so that he is able

to manage the investments with full efficiency and effectiveness

Unlike mutual funds, portfolio managers do not need to follow any rigid rules of

investing a particular sum of money in a particular investment mode. Mutual

fund managers require to work according to regulations set up by financial authorities of

their country. For example in India, they need to follow rules set up by SEBI.


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Services & Strategies provided in Portfolio Management

1. Portfolio managers work as a personal relationship manager with whom the client

can interact at any time as per his preference.

2. To discuss any topics regarding money or saving, the client can interact with his

portfolio manager on a monthly basis.

3. The client can also discuss on any major changes that he wants in his assetallocation or investment strategies.

4. Portfolio management service (PMS) handles all types of administrative work

such as opening a new bank account or dealing with a financial settlement or

depository transaction.

5. For online Portfolio management service (PMS), the client receives a User-ID and

Password that helps him in getting online access to his portfolio details as and

when he wants.

6. Portfolio management service (PMS) also helps tax planning and tax management

of client based on detailed statement of transactions in his portfolio.


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Portfolio Manager

Any person (a Company registered under SEBI as a Portfolio Manager) 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, as the case may

be is a portfolio manager.

SEBI takes into account all matters which it deems relevant to the activities relating to

portfolio management. The applicant has to be a body corporate and must have

necessary infrastructure like adequate office space, equipments and the manpower to

effectively discharge the activities of a portfolio manager. The principal officer of the

applicant should have either a professional qualification in finance, law, accountancyor business management from a university or an institution recognized by the Central

Government or any State Government or a foreign university; or an experience of at

least ten years in related activities in the securities market including in a portfolio

manager, stock broker or as a fund manager.

The applicant should have in its employment minimum of two persons who, between

them, have at least five years experience as portfolio manager or stock broker or

investment manager or in the areas related to fund management. The applicant also has tofulfill the capital adequacy requirements, etc.

Minimum amount of investment for PMS

The portfolio manager is required to accept funds or listed securities having a minimumworth of INR 5 lacs from the client while opening the account for the purpose of

rendering portfolio management service to the client.

The investors have the flexibility to add further money to the fund as per the terms of

agreement with the Portfolio Manager.


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The disclosure mechanism of portfolio managers for their clients

The portfolio manager provides to the client the Disclosure Document at least two days

prior to entering into an agreement with the client. The Disclosure Document , inter

alia, contains the quantum and manner of payment of fees payable by the client for each

activity for which service is rendered by the portfolio manager directly or indirectly

(where such service is out sourced), portfolio risks, complete disclosures in respect of

transactions with related parties as per the accounting standards specified by the

Institute of Chartered Accountants of India in this regard, the performance of the

portfolio manager and the audited financial statements of the portfolio manager for the

immediately preceding three years.

Procedure for withdrawal/ redemption of funds

The customer can withdraw/ redeem whole of the fund at any time giving intimation to

the Portfolio Manager as per the terms of the agreement. On receiving the intimation,

the Portfolio Manager shall settle the portfolio account and make the repayment after

deducting the legitimate expenses, taxes and charges as per the terms of the agreement.

The customer can make Partial Withdrawals from fund at any time as required by

him/her/it or at regular intervals provided the balance in the funds does not fall below

the minimum investment of INR 5 lacs or such other amount as may be determined by

the SEBI from time to time.


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The Payment Criteria

There are 2 types of payment criteria offered by portfolio managers to their clients, such

as:

Fixed-linked management fee

Performance-linked management fee

In the fixed-link management fee, client usually pays 2-2.5% of the portfolio valuecalculated on basis of weighted average method.

In the performance-linked management fee, client pays a flat fee ranging from 0.5-1.5%

based on performance of portfolio managers. Profits are calculated on basis of 'high

watermarking' concept. This means that the client pays fees only on basis of positive

returns on his investment.

In addition to above criteria, the manager also charges around 15-20% of the total profit

earned that is by the client. Portfolio managers can also claim separate charges gained

from custodial services, brokerage, and tax payments.


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Tax on returns from PMS

The returns from PMS are taxable in the hands of customers. Returns from sale of

securities held for a period of less than 12 months are taxable as short-term capital gains@ 10% plus applicable surcharge and education cess. Returns from sale of securities

held for a period of more than 12 months come under long-term capital gains and

presently, there is no tax on long-term capital gains from listed securities.


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Reserve Bank of India (RBI) prudential norms for classification, valuation and

operation of investment portfolio by banks

Reconciliation of holdings of Govt. securities Audit Certificate

Banks should furnish a Statement of the Reconciliation of Bank's Investments (held in

own Investment account, as also under PMS), as at the end of every accounting year

duly certified by the bank's auditors. The statement should reach the Regional Office of

the DBS, RBI, under whose jurisdiction the banks head office is located within one

month from the close of the accounting year. Banks in the letters of appointment, issued

to their external auditors, may suitably include the aforementioned requirement of

reconciliation.

Transactions in securities - Custodial functions

While exercising the custodial functions on behalf of their merchant banking subsidiaries,

these functions should be subject to the same procedures and safeguards as would be

applicable to other constituents. Accordingly, full particulars should be available with thesubsidiaries of banks of the manner in which the transactions have been executed. Banks

should also issue suitable instructions in this regard to the department/office undertaking

the custodial functions on behalf of their subsidiaries.

Portfolio Management on behalf of clients


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i) The general powers vested in banks to operate PMS and similar schemes have been

withdrawn. No bank should, therefore, restart or introduce any new PMS or similar

scheme in future without obtaining specific prior approval of the RBI. However, bank-

sponsored NBFCs are allowed to offer discretionary PMS to their clients, on a case-to-

case basis.

ii) The following conditions are to be strictly observed by the banks operating PMS or

similar scheme with the specific prior approval of RBI :

(a) PMS should be entirely at the customer's risk, without guaranteeing, either directly

or indirectly, a pre-determined return.

(b) Funds should not be accepted for portfolio management for a period less than one

year.

(c) Portfolio funds should not be deployed for lending in call/notice money; inter-bank

term deposits and bills rediscounting markets and lending to/placement with corporate

bodies.

(d) Banks should maintain client wise account/record of funds accepted formanagement and investments made there against and the portfolio clients should be

entitled to get a statement of account.

(e) Bank's own investments and investments belonging to PMS clients should be kept

distinct from each other, and any transactions between the bank's investment account and

client's portfolio account should be strictly at market rates.

(f) There should be a clear functional separation of trading and back office functions

relating to banks own investment accounts and PMS clients' accounts.

iii) PMS clients' accounts should be subjected by banks to a separate audit by external

auditors


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iv) Banks should note that violation of RBI instructions will be viewed seriously and

will invite deterrent action against the banks, which will include raising of reserve

requirements, withdrawal of facility of refinance from the RBI and denial of access to

money markets, apart from prohibition from undertaking PMS activity.

v) Further, the aforesaid instructions will apply, mutatis mutandis, to the subsidiaries of

banks except where they are contrary to specific regulations of the RBI or SEBI,

governing their operations.

vi) Banks / merchant banking subsidiaries of banks operating PMS or similar scheme

with the specific prior approval of the RBI are also required to comply with the

guidelines contained in the SEBI (Portfolio Managers) Rules and Regulations, 1993 and

those issued from time to time.

Investment Portfolio of bank - transactions in Government Securities

In the light of fraudulent transactions in the guise of Government securities, transactions

in physical format by a few co-operative banks with the help of some broker entities, it


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has been decided to accelerate the measures for further reducing the scope of trading in

physical forms. These measures are as under:

(i) For banks, which do not have SGL account with RBI, only one gilt account can beopened.

(ii) In case the gilt accounts are opened with a scheduled commercial bank, the account

holder has to open a designated funds account (for all gilt account related transactions)

with the same bank.

(iii) The entities maintaining the gilt / designated funds accounts will be required to

ensure availability of clear funds in the designated funds accounts for purchases and of

sufficient securities in the gilt account for sales before putting through the transactions.

(iv) No transactions by the bank should be undertaken in physical form with any broker.

(v) Banks should ensure that brokers approved for transacting in Government securities

are registered with the debt market segment of NSE/BSE/OTCEI.

Securities & Exchange Board of India (Portfolio Managers) Regulations, 1993


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Registration of portfolio managers

No person shall act as portfolio manager unless he holds a certificate granted by the

Board under these regulations:

Provided that a merchant banker acting as a portfolio manager immediately before

commencement of the Securities and Exchange Board of India (Portfolio Managers)

(Second Amendment) Regulations, 2006 may continue to do so for a period of six

months from such commencement or, if he has made an application for registration under

these regulations within the stipulated period of six months, till the disposal of such

application.

Application for grant of certificate

An application by a portfolio manager for the grant of a certificate shall be made to

the Board inForm A and shall be accompanied by a non-refundable application fee,

as specified in clause (1) of Schedule II, to be paid in the manner specified inPart B

thereof.

Notwithstanding anything contained in sub-regulation (1), any application made by a

portfolio manager prior to coming into force of these regulations containing suchparticulars or as near thereto as mentioned in Form A shall be treated as an

application made in pursuance of sub - regulation (1) and dealt with accordingly.

Application to conform to the requirements


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Subject to the provisions of sub-regulation (2) of regulation 3, any application,

which is not complete in all respects and does not conform to the instructions

specified in the form, shall be rejected.

Provided that, before rejecting any such application, the applicant shall be givenan opportunity to remove within the time specified such objections as may be

indicated by the Board.

Furnishing of further information, clarification and personal representation

(1)The Board may require the applicant to furnish further information or

clarification regarding matters relevant to his activity of a portfolio manager

for the purposes of disposal of the application.

(2)The applicant or, its principal officer shall, if so required, appear before the

Board for personal representation.

Consideration of application


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(1) For considering the grant of certificate of registration to the applicant, the

Board shall take into account all matters which it deems relevant to the

activities relating to portfolio management.

(2)Without prejudice to the generality of the foregoing provisions, the Board shallconsider whether-

(a) The applicant is a body corporate;

(b) The applicant has the necessary infrastructure like adequate office space,

equipments and the manpower to effectively discharge the activities of a

portfolio manager;

(c) The principal officer of the applicant has either

(i) A professional qualification in finance, law, accountancy or business

management from a university or an institution recognized by the Central

Government or any State Government or a foreign university; or

(ii) An experience of at least ten years in related activities in the securities

market including in a portfolio manager, stock broker or as a fund manager.

(d) The applicant has in its employment minimum of two persons who, betweenthem, have at least five years experience in related activities in portfolio

management or stock broking or investment management or in the areas related to

fund management;

(e) Any previous application for grant of certificate made by any person directly or

indirectly connected with the applicant has been rejected by the Board;

(f) Any disciplinary action has been taken by the Board against a person directly

or indirectly connected with the applicant under the Act or the Rules or theRegulations made there under.

Explanation For the purposes of sub-clauses (e) and (f), the expression "person directly

or indirectly connected" means any person being an associate, subsidiary, inter-connected


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company or a company under the same management within the meaning of section

370(1B) of the Companies Act,1956 or in the same group;

(g) The applicant fulfills the capital adequacy requirements specified in regulation

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(h) The applicant, its director, principal officer or the employee as specified in

clause (d) is involved in any litigation connected with the securities market which

has an adverse bearing on the business of the applicant;

(i) The applicant, its director, principal officer or the employee as specified in

clause (d) has at any time been convicted for any offence involving moral

turpitude or has been found guilty of any economic offence;

(j) The applicant is a fit and proper person

(k) Grant of certificate to the applicant is in the interest of investors.

Criteria for fit and proper person

For the purposes of determining whether an applicant or the portfolio manager is a

fit and proper person the Board may take into account the criteria specified in

Schedule II

Capital Adequacy Requirement


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The capital adequacy requirement referred to in clause (g) of regulation 6 shall not

be less than the net worth of two crore rupees

Provided that a portfolio manager, who was granted a certificate under these

regulations prior to the commencement of the Securities and Exchange Board ofIndia (Portfolio Managers) (Amendment) Regulations, 2008, shall raise its net

worth to not less than one crore rupees within six months from such

commencement and to not less than two crore rupees within six months thereafter:

Provided further that the portfolio manager shall fulfill capital adequacy

requirement under these regulations, separately and independently, of capital

adequacy requirements, if any, for each activity undertaken by it under the

relevant regulations

Explanation for the purposes of this regulation, "net worth" means the aggregate value

of paid up equity capital plus free reserves (excluding reserves created out of revaluation)

reduced by the aggregate value of accumulated losses and deferred expenditure not

written off, including miscellaneous expenses not written off.

Procedure for registration

The Board on being satisfied that the applicant fulfils the requirements specified in

regulation 6 shall send an intimation to the applicant and on receipt of the payment

of registration fees as specified in clause (1A) of] Schedule II then grant acertificate in Form B.

Renewal of certificate


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(1) A portfolio manager may, three months before the expiry of the validity of the

certificate, make an application for renewal in Form A along with fees specified in

clause 1 of Schedule II.

(2) The application for renewal, under sub-regulation (1) shall be dealt with in thesame manner as if it were an application for grant of a certificate made under

regulation 3.

(3) The Board, on being satisfied that the applicant fulfills the requirements

specified in regulation 6, shall send intimation to the applicant and on receipt of

payment of renewal fees as specified in paragraph 2 of Schedule II, grant a

renewal of the certificate.

Conditions of registration

(1) Any registration granted under regulation 8 or any renewal granted under

regulation 9 shall be subject to the following conditions, namely:-

(a) Where the portfolio manager proposes to change its status or

constitution, it shall obtain prior approval of the Board for continuing to

act as such after the change;

(b) It shall pay the fees for registration or renewal, as the case may be, in

the manner provided in these regulations;

(c) It shall take adequate steps for redressal of grievances of the investorswithin one month of the date of the receipt of the complaint and keep

the Board informed about the number, nature and other particulars of

the complaints received;


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(d) It shall maintain capital adequacy requirements specified in regulation 7

at all times during the period of the certificate or renewal thereof;

(e) It shall abide by the regulations made under the Act in respect of the

activities carried on by it as portfolio manager.

(2) Nothing contained in clause (a) of sub-regulation (1) shall affect the obligation

to obtain a fresh registration under section 12 of the Act in cases where it is

applicable.

Period of validity of certificate

The certificate of registration granted under regulation 8 and its renewal granted

under regulation 9 shall be valid for a period of three years from the date of its

issue to the applicant.

Procedure where registration is not granted

(1) Where an application for grant of a certificate under regulation 3 or of renewal

under regulation 9 does not satisfy the requirements set out in regulation 6, the

Board may reject the application, after giving an opportunity of being heard.

(2) The refusal to grant registration shall be communicated by the Board within

thirty days of such refusal to the applicant stating therein the grounds on which the

application has been rejected.


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(3) Any applicant may, being aggrieved by the decision of the Board under sub-

regulation (1), apply within a period of thirty days from the date of receipt of such

intimation, to the Board for reconsideration of its decision.

(4) The Board shall reconsider an application made under sub regulation (3) andcommunicate its decision as soon as possible in writing to the applicant.

Effect of refusal to grant certificate

Any portfolio manager whose application for a certificate has been refused by theBoard shall on and from the date of the receipt of the communication under sub

regulation (2) of regulation 10 cease to carry on any activity as portfolio manager.

Payment of fees, and the consequences of failure to pay fees

(1) Every applicant eligible for grant of a certificate shall pay feesin such mannerand within the period specified in Schedule II.

(2) Where a portfolio manager fails to pay the fees as provided inSchedule II, the

Board may suspend the certificate, whereupon theportfolio manager shall

forthwith cease to carry on the activity as aportfolio manager for the period during

which the suspension subsists.


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General obligations and responsibilities

Code of Conduct

Every portfolio manager shall abide by the Code of Conduct as specified in

Schedule III.

Contract with clients and disclosures

(1) (A) The portfolio manager shall, before taking up an assignment ofmanagement of funds or portfolio of securities on behalf of a client, enter into an

agreement in writing with such client clearly defining the inter se relationship, and

setting out their mutual rights, liabilities and obligations relating to management of

funds or portfolio of securities containing the details as specified in Schedule IV.

(b) The agreement between the portfolio manager and the client shall, inter alia,

contain:

(i) The investment objectives and the services to be provided;

(ii) Areas of investment and restrictions, if any, imposed by the client with

regard to the investment in a particular company or industry;

(iii) Type of instruments and proportion of exposure;

(iv) Tenure of portfolio investments;

(v) Terms for early withdrawal of funds or securities by the clients;

(vi) Attendant risks involved in the management of the portfolio;

(vii) Period of the contract and provision of early termination, if any;


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(viii) Amount to be invested subject to the restrictions provided under these

regulations;

(ix) Procedure of settling client's account including form of repayment on

maturity or early termination of contract;

(x) Fees payable to the portfolio manager;

(xi) The quantum and manner of fees payable by the client for each activity

for which service is rendered by the portfolio manager directly or indirectly

(where such service is out sourced);

(xii) Custody of securities;

(xiii) In case of a discretionary portfolio manager a condition that the

liability of a client shall not exceed his investment with the portfolio

manager;

(xiv) The terms of accounts and audit and furnishing of the reports to the

clients as per the provisions of these regulations; and

(xv) Other terms of portfolio investment subject to these regulations.

(2) (a) The portfolio manager shall provide to the client, the Disclosure Document

as specified in Schedule V, along with a certificate in Form C as specified in

Schedule I, at least two days prior to entering into an agreement with the client as

referred to in sub-regulation (1)

(b) The Disclosure Document, shall inter alia contain the following

(i) the quantum and manner of payment of fees payable by the client for

each activity for which service is rendered by the portfolio manager directly

or indirectly (where such service is out sourced);


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(ii) portfolio risks;

(iii) complete disclosures in respect of transactions with related parties as

per the accounting standards specified by the Institute of Chartered

Accountants of India in this regard;

(iv) the performance of the portfolio manager:

Provided that the performance of a discretionary portfolio manager shall be

calculated using weighted average method taking each individual category

of investments for the immediately preceding three years and in such cases

performance indicators shall also be disclosed;

(v) the audited financial statements of the portfolio manager for theimmediately preceding three years.

(c) The contents of the Disclosure Document shall be certified by an independent

chartered accountant.

(d) The portfolio manager shall file with the Board, a copy of the Disclosure

Document before it is circulated or issued to any person and every six monthsthereafter or whenever any material change is effected therein whichever is earlier,

along with the certificate in Form C as specified in Schedule

(3) (a) The portfolio manager shall charge an agreed fee from the clients for

rendering portfolio management services without guaranteeing or assuring, either

directly or indirectly, any return and the fee so charged may be a fixed fee or a

return based fee or a combination of both.

(b) The portfolio manager may, subject to the disclosure in terms of the Disclosure

Document and specific permission from the client, charge such fees from the


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client for each activity for which service is rendered by the portfolio manager

directly or indirectly (where such service is out sourced).

General responsibilities of a Portfolio Manager

(1) The discretionary portfolio manager shall individually and independently

manage the funds of each client in accordance with the needs of the client in a

manner which does not take character of a Mutual Fund, whereas the non

discretionary portfolio manager shall manage the funds in accordance with the

directions of the client.

(1A) The portfolio manager shall not accept from the client, funds or securities

worth less than five lacs rupees.

(2) The portfolio manager shall act in a fiduciary capacity with regard to the

client's funds.

(2A) The portfolio manager shall keep the funds of all clients in a separate account

to be maintained by it in a Scheduled Commercial Bank.

Explanation - For the purposes of this sub-regulation, the expression Scheduled

Commercial Bank means any bank included in the Second Schedule to the Reserve Bank

of India Act, 1934 (2 of 1934).

(3) The portfolio manager shall transact in securities within the limitation placed

by the client himself with regard to dealing in securities under the provisions of

the Reserve Bank of India Act, 1934 (2 of 1934).


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(4) The portfolio manager shall not derive any direct or indirect benefit out of the

client's funds or securities.

(4A) The portfolio manager shall not borrow funds or securities on behalf of the

client.

(5) The portfolio manager shall not lend securities held on behalf of clients to a

third person except as provided under these regulations.

(6) The portfolio manager shall ensure proper and timely handling of complaints

from his clients and take appropriate action immediately.

Investment of clients' moneys and management of clients' portfolio of

securities

(1) (a) The money or securities accepted by the portfolio managershall not be

invested or managed by the portfolio managerexcept in terms of the agreement

between the portfoliomanager and the client.

(b) Any renewal of portfolio fund on maturity of the initial periodshall be deemedas a fresh placement

(2) Notwithstanding anything contained in the agreement referred toin regulation

14, the funds or securities can be withdrawn or taken back bythe client before the

maturity of the contract under the followingcircumstances, namely-

(a) voluntary or compulsory termination of portfolio managementservices by the

portfolio manager or the client.

(b) suspension or cancellation of the certificate of registration ofthe portfolio

manager by the Board.

(c) bankruptcy or liquidation of the portfolio manager.


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(3) The portfolio manager shall invest funds of his clients in moneymarket

instruments or derivatives or as specified in the contract.

Provided that leveraging of portfolio shall not be permitted in respectof

investment in derivatives. Provided that the portfolio manager shall not deploy theclients' funds in bill discounting, badla financing or for the purpose of lending or

placement with corporate or non-corporate bodies.

Explanation. For the purposes of this sub-regulation: "money market instruments"

includes commercial paper, trade bill, treasury bills, and certificate of deposit and

ussance bills.

(4) The portfolio manager shall not while dealing with clients funds indulge in

speculative transactions that is, he shall not enter into any transaction for purchase

or sale of any security which is periodically or ultimately settled otherwise than by

actual delivery or transfer of security except the transactions in derivatives.

(5) The portfolio manager shall, ordinarily purchase or sell securities separately

for each client. However, in the event of aggregation of purchases or sales for

economy of scale, inter se allocation shall be done on apro ratabasis and at

weighted average price of the day's transactions. The portfolio manager shall notkeep any open position in respect of allocation of sales or purchases affected in a

day.

(6) Any transaction of purchase or sale including that between the portfolio

manager's own accounts and client's accounts or between two clients' accounts

shall be at the prevailing market price.

(7) The portfolio manager shall segregate each clients funds and portfolio of

securities and keep them separately from his own funds and securities and beresponsible for safekeeping of clients' funds and securities.

(8) The portfolio manager shall not hold the listed securities, belonging to the

portfolio account, in its own name on behalf of its clients either by virtue of

contract with clients or otherwise.


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Provided that any portfolio manager holding the listed securities belonging to the

portfolio account in its own name on behalf of its clients on the date of

commencement of the Securities and Exchange Board of India (Portfolio

Managers) (Amendment) Regulations, 2008 shall segregate each clients listed

securities and keep them separately within six months from such commencement.

Provided further that the Board may in the interest of investors or for the

development of securities market, on an application made in this behalf by a

portfolio manager with respect to any specific investment existing on the date of

commencement of the Securities and Exchange Board of India (Portfolio

Managers) (Amendment) Regulations, 2008, relax the strict enforcement of this

regulation.

(9) The portfolio manager may, subject to authorization by the client in writing,

participate in securities lending.

Foreign Institutional Investor and sub-accounts availing portfolio

management services

Foreign institutional investors and subaccountsregistered with the Board may

avail of the services of a portfoliomanager.


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Appointment of custodian

(1) Every portfolio manager shall appoint a custodian in respect of securities

managed or administered by it.

(2) Nothing contained in this regulation shall apply to a portfolio manager

(a) Who has total assets under management of value less than five hundred crore

rupees

Or

(b) who performs purely advisory functions.

Maintenance of books of accounts, records

(1) Every portfolio manager shall keep and maintain the following books of

accounts, records and documents namely:-

(a) A copy of balance sheet at the end of each accounting period;

(b) A copy of the profit and loss account for each accountingperiod;

(c) A copy of the auditors report on the accounts for eachaccounting period;

(d) A statement of financial position and;

(e) Records in support of every investment transaction orrecommendation which

will indicate the data, facts andopinion leading to that investment decision.

(2) Every portfolio manager shall intimate to the Board the place where the books

of accounts, records and documents are maintained.


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(3) Without prejudice to sub-regulation (1), every portfolio manager shall, after

the end of each accounting period, furnish to the Board copies of the balance

sheet, profit and loss account and such other documents as are mentioned in any of

the regulations under this chapter for any other preceding five accounting years

when required by the Board.

Submission of half-yearly results

Every portfolio manager shall furnish to the Board half-yearly-unaudited financial

results when required by the Board with a view to monitor the capital adequacy of

the portfolio manager.

Maintenance of books of accounts, records and other documents

The portfolio manager shall preserve the books of accountand other records and

documents mentioned in any of the regulationsmentioned under this chapter for aminimum period of five years.


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Accounts and audit

(1) (a) The portfolio manager shall maintain separate client-wise accounts.

(b) The funds received from the clients, investments or disinvestments and all thecredits to the account of the client like interest, dividend, bonus, or any other

beneficial interest received on the investment and debits, for expenses, if any, shall

be properly accounted for and details thereof shall be properly reflected in the

client's account.

(c) The tax deducted at source as required under the provisions of the Income-Tax

Act, 1961, (43 of 1961) shall be recorded in the portfolio account.

(2) The books of account will be audited yearly by qualified auditor to ensure thatthe portfolio manager has followed proper accounting methods and procedures and

that the portfolio manager has performed his duties in accordance with the law. A

certificate to this effect shall, if so specified, be submitted to the Board within six

months of close of portfolio manager's accounting period.

(3) The portfolio accounts of the portfolio manager shall be audited annually by an

independent chartered accountant and a copy of the certificate issued by the

chartered accountant shall be given to the client.

(4) The client may appoint a chartered accountant to audit the books and accounts

of the portfolio manager relating to his transactions and the portfolio manager

shall co-operate with such chartered accountant in course of the audit.


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Reports to be furnished to the client

(1) 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 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.

(1A) The report referred to in sub-regulation (1) may be made available on thewebsite of the portfolio manager with restricted access to each client.

(2) The portfolio manager shall 3[in terms of the agreement with the client] also

furnish to the client documents and information relating only to the management of a

portfolio.

(3) On termination of the contract, the portfolio manager shall give a detailed

statement of accounts to the client and settle the account with the client as agreed in

the contract.

(4) The client shall have the right to obtain details of his portfolio from the portfolio

managers.


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Report on steps taken on Auditor's report

Every portfolio manager shall within two months from the date of the auditors

report take steps to rectify the deficiencies, made out in the auditors report.

Disclosures to the Board

A portfolio manager shall disclose to the Board as and when required the

following information namely:-

(i) particulars regarding the management of a portfolio;

(ii) any change in the information or particulars previously furnished, which have

a bearing on the certificate granted to him;

(iii) the names of the clients whose portfolio he has managed;

(iv) particulars relating to the capital adequacy requirement as specified in

regulation 7.

Appointment of compliance officer

(1) Every portfolio manager shall appoint a compliance officer who shall be

responsible for monitoring the compliance of the Act, rules and regulations,

notifications, guidelines, instructions etc., issued by the Board or the Central

Government and for redressal of investors' grievances.

(2) The compliance officer shall immediately and independently report to the

Board any non-compliance observed by him.


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Inspection and disciplinary proceedings

Right of inspection by the Board

(1) The Board may appoint one or more persons as inspecting authority to

undertake the inspection of the books of account, records and documents of the

portfolio manager for any of the purposes specified in sub-regulation (2).

(2) The purposes referred to in sub-regulation (1) may be as follows, namely:-

(a) to ensure that the books of account are being maintained in the manner

required;

(b) that the provisions of the Act, rules and regulations are being complied with;

(c) to investigate into the complaints received from investors, other portfolio

managers or any other person on any matter having a bearing on the activities of

the portfolio manager;

And

(d) to investigatesuo motu in the interest of securities business or investors'

interest into the affairs of the portfolio manager.


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Notice before inspection

(1) Before undertaking an inspection under regulation 24, the Board shall give a

reasonable notice to the portfolio manager, for that purpose.

(2) Notwithstanding anything contained in sub-regulation (1), where the Board is

satisfied that in the interest of the investors no such notice should be given, it may

by an order in writing direct that the inspection of the affairs of the portfolio

manager be taken up without such notice.

(3) During the course of inspection the portfolio manager against whom an

inspection is being carried out shall be bound to discharge his obligations as

provided under regulation 26.

Obligations of Portfolio Manager on inspection

(1) It shall be the duty of every director, proprietor, partner, officer and employee

of the portfolio manager who is being inspected to produce to the inspecting

authority such books, accounts and other documents in his custody or control andfurnish him with the statements and information relating to his activities as a

portfolio manager within such time as the inspecting authority may require.

(2) The portfolio manager shall allow the inspecting authority to have a reasonable

access to the premises occupied by such portfolio manager or by any other person,

on his behalf and also extend reasonable facility for examining any books, records,

documents and computer data in the possession of the portfolio manager or any

such other person and also provide copies of documents or other material which in

the opinion of the inspecting authority are relevant for the purposes of the

inspection.

(3) The inspecting authority shall in the course of inspection, be entitled to

examine or record statements of any principal officer, director, partner, proprietor

and employee of the portfolio manager.


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(4) It shall be the duty of every director, proprietor, partner, officer or employee of

the portfolio manager to give to the inspecting authority all assistance in

connection with the inspection which the portfolio manager may reasonably be

expected to give.

Submission of report to the Board

The inspecting authority shall, as soon as may be possible, submit an inspection

report to the Board.

Action on inspection or investigation report

The Board or the Chairman shall after consideration of the inspection or

investigation report take such action as the Board or Chairman may deem fit and

appropriate including action

Appointment of Auditor

The Board may appoint a qualified auditor to investigate into the books of account

or the affairs of the portfolio manager. Provided that the auditor so appointed shall

have the same powers of the inspecting authority as are mentioned in regulation 24

and the obligation of the portfolio manager and his employees in regulation 26

shall be applicable to the investigation under this regulation.


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Procedure for action in case of default

Liability for action in case of default

A portfolio manager who contravenes any of the provisions of the Act, Rules or

Regulations framed there under shall be liable for one or more action specified

therein including the action under Chapter V of the Securities and Exchange Board

of India (Intermediaries) Regulations, 2008.

Miscellaneous

Power of the Board to issue clarifications

In order to remove any difficulties in respect of the application or interpretation of

these regulations, the Board may issue clarifications or guidelines in the form ofcirculars


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Fees

(1)Every portfolio manager shall pay a non-refundable fee of one lakh rupees along with

the application for grant or renewal of certificate of registration.

Every portfolio manager shall pay a sum of ten lakh rupees as registration fees at the time

of the grant of certificate by the Board.

(2)Every portfolio manager shall pay a renewal fee of five lakh rupees upon grant of

renewal.

3. (a) The fee referred to in paragraph (1) shall be paid by the portfolio manger within

fifteen days from the date of receipt of intimation from the Board under regulation 8.

(b) The fee referred to in paragraph (2), shall be paid by the portfolio manager within

fifteen days from the date of receipt of intimation from the Board 4[under sub-regulation

(3) of regulation 9.

4. The fees specified in paragraphs (1) and (2) above, shall be payable by the portfolio

manager by a demand draft in favour of "Securities and Exchange Board of India"

payable at Mumbai or at the respective regional office


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Code of Conduct- Portfolio Manager

1. A portfolio manager shall, in the conduct of his business, observe high standards of

integrity and fairness in all his dealings with his clients and other portfolio managers.

2. The money received by a portfolio manager from a client for an investment purpose

should be deployed by the portfolio manager as soon as possible for that purpose and

money due and payable to a client should be paid forthwith.

3. A portfolio manager shall render at all times high standards of service, exercise due

diligence, ensure proper care and exercise independent professional judgment. The

portfolio manager shall either avoid any conflict of interest in his investment ordisinvestment decision, or where any conflict of interest arises; ensure fair treatment to

all his customers. He shall disclose to the clients, possible source of conflict of duties and

interests, while providing unbiased services. A portfolio manager shall not place his

interest above those of his clients.

4. A portfolio manager shall not make any statement or become privy to any act, practice

or unfair competition, which is likely to be harmful to the interests of other portfolio

managers or is likely to place such other portfolio managers in a disadvantageousposition in relation to the portfolio manager himself, while competing for or executing

any assignment.

5. A portfolio manager shall not make any exaggerated statement, whether oral or

written, to the client either about the qualification or the capability to render certain

services or his achievements in regard to services rendered to other clients.

6. At the time of entering into a contract, the portfolio manager shall obtain in writing

from the client, his interest in various corporate bodies which enables him to obtain

unpublished price-sensitive information of the body corporate.


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7. A portfolio manager shall not disclose to any clients, or press any confidential

information about his client, which has come to his knowledge.

8. The portfolio manager shall where necessary and in the interest of the client takeadequate steps for registration of the transfer of the clients' securities and for claiming

and receiving dividends, interest payments and other rights accruing to the client. He

shall also take necessary action for conversion of securities and subscription/renunciation

of/or rights in accordance with the clients' instruction.

9. A portfolio manager shall endeavor to -

(a) ensure that the investors are provided with true and adequate information withoutmaking any misguiding or exaggerated claims and are made aware of attendant risks

before any investment decision is taken by them;

(b) render the best possible advice to the client having regard to the client's needs and the

environment, and his own professional skills;

(c) ensure that all professional dealings are effected in a prompt, efficient and cost

effective manner.

10. (1) A portfolio manager shall not be a party to -

(a) creation of false market in securities;

(b) price rigging or manipulation of securities;

(c) passing of price sensitive information to brokers, members of the stock exchanges and

any other intermediaries in the capital market or take any other action which is prejudicialto the interest of the investors.

(2) No portfolio manager or any of its directors, partners or manager shall either on their

respective accounts or through their associates or family members, relatives enter into


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any transaction in securities of companies on the basis of unpublished price sensitive

information obtained by them during the course of any professional assignment.

11.(a) A portfolio manager or any his employees shall not render, directly or indirectly

any investment advice about any security in the publicly accessible media, whether real-

time or non-real-time, unless a disclosure of his long or short position in the said security

has been made, while rendering such advice.

(b) In case an employee of the portfolio manager is rendering such advice, he shall also

disclose the interest of his dependent family members and the employer including their

long or short position in the said security, while rendering such advice.

12. (a) The portfolio manager shall abide by the Act, and the Rules, Regulations made

there under and the Guidelines / Schemes issued by the Board.

(b) The portfolio manager shall comply with the model code of conduct specified in the

SEBI (Prohibition of Insider Trading) Regulations, 1992.

(c) The portfolio manager shall not use his status as any other registered intermediary to

unduly influence the investment decision of the clients while rendering portfoliomanagement services.

Date post:	06-Apr-2018
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Regulation of Portfolio Management Services(Final Copy)

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