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SEBI Changes in PMS Regulations so far
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Portfolio Management Services (PMS) in India are governed by the SEBI (Portfolio Managers) Regulations, 1993. SEBI has proposed lots of changes time to time (latest announced in Feb 2020, to be implemented from 1st Oct 2020) to make Portfolio Management Services more transparent and investor friendly.

The amendments over time horizon are:

Increase in ticket size of investment:  Markets regulator SEBI has hiked minimum investment in PMS to Rs.50 lakh from Rs.25 lakh, applicable for new clients and fresh investments by existing clients. The rationale behind the increase is to avoid retail investors with limited understanding of volatility and risk entering this product, as it is meant for investors with higher risk taking capacity.

Graded exit loads: Portfolio Managers cannot impose a lock-in on investment made by their clients. However they can charge an exit fee for early exit. In case client portfolio is redeemed in part or full, the exit load charged shall be as under:

  1. In the first year of investment, maximum of 3% of the amount redeemed.
  2. In the second year of investment, maximum of 2% of the amount redeemed.
  3. In the third year of investment, maximum of 1% of the amount redeemed.

After a period of three years from the date of investment, no exit load.

Other Charges: Operating expenses excluding brokerage, over and above the fees charged for Portfolio Management Service, shall not exceed 0.50% per annum of the client’s average daily Assets under Management (AUM).

Charges for all transactions in a financial year (Broking, Demat, custody etc.) through self or associates shall be capped at 20% by value per associate (including self) per service. Any charges to self/associate shall not be at rates more than that paid to the non-associates providing the same service. Upfront fee and Entry load cannot be charged anymore.

Standardizing reporting: Performance reporting standards were revisited in light of the need for standardized & accurate reporting for all Portfolio Managers.

Portfolio managers need to consider  all  cash  holdings  and  investments  in  liquid  funds,  for calculation of performance which should be reported net of all fees and expenses (including taxes) is calculated by ‘Time Weighted Rate of Return’ (TWRR) method. The performance such reported to SEBI should be same in all marketing material and website of the Portfolio Manager.

Direct on-boarding of clients: Portfolio Managers shall provide an option to clients to be on-boarded directly, without intermediation of persons engaged in distribution services. They shall prominently disclose in its Disclosure Documents, marketing material and on its website, about the option for direct on-boarding. At the time of on-boarding of clients directly, no charges except statutory charges shall be levied so that they benefit from lower expenses compared to the regular options. However, as of now, the entire onboarding process is not done online.

Net-worth requirement: Net-worth requirement of Portfolio Managers to be enhanced from Rs.2 crores to Rs.5 crores, existing portfolio managers will have to meet the requirement norms in 36 months.

Portfolio Universe: The PMS Regulations, 2020 introduce restrictions on investment in unlisted securities by mandating discretionary PMS to invest only in listed securities, while non-discretionary PMS can invest in unlisted securities up to 25% of their AUM.

Investment Approach: Standard nomenclature called the Investment Approach of Portfolio Managers shall be uniform across all types of regulatory reporting, client reporting, disclosure document, marketing materials and any such document which refer to services offered by Portfolio Managers. Description of investment approach should include its objectives, description of type of securities, basis of selection, allocation, benchmark, investment horizon, risk associated with it and other salient features. This move will allow investors to compare performance of multiple investment approaches under the same or other Portfolio Managers.

Portfolio managers clearly need to disclose any change in investment approach that may impact the performance of client portfolio in the marketing material and provide a disclaimer in all marketing material stated that the performance related information provided therein is not verified by SEBI.

Periodic reporting to SEBI:

  1. A certificate from the qualified Chartered Accountant certifying the net-worth  as  on  March  31,  every  year  based  on  audited  account within 6 months from the end of Financial Year.
  2. A  certificate  of  compliance  with  PMS  Regulations  and  circulars issued  hereunder, duly  signed  by  the Principal  Officer,  within  60 days  of  end  of  each  financial  year.  Further, details of non-compliance along with the corrective actions, if any, duly approved by Board of the portfolio manager.
  3. Monthly  report  regarding their portfolio management activity, on SEBI intermediaries Portal within 7  working  days  of  the  end  of  each  month,  as  per  the  revised  format till now it is 5 days.
  4. SEBI has increased the frequency of reporting to clients from the earlier half yearly reporting to quarterly reporting to clients in standardized format.
  5. The firm-level performance data of Portfolio Managers shall be audited annually.

Disclosure Document: Any material change like change in control of the Portfolio Manager, Principal Officer, fees charged, charges associated with the services offered,  investment approaches offered (along with the impact of such change) and such other changes as specified by SEBI from time to time should be clearly stated in this document.

Appointment of a custodian: Every portfolio manager shall appoint a custodian in respect of securities managed or administered by it except for those who provide only advisory services.

Employees under Portfolio Management: Employment of one person minimum in addition to principal officer and compliance officer by portfolio managers is mandatory.

The educational qualification as well as work experience of them should be as per this qualifying criteria:

Particular

Criteria

Principal Officer

(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 a CFA charter from the CFA institute;

(ii) experience of at least five years in related activities in the securities market including in a portfolio manager, stock broker, investment advisor, research analyst or as a fund manager; and

(iii) The relevant NISM certification as specified by the Board from time to time.

Provided that at least 2 years of relevant experience is in portfolio management or investment advisory services or in the areas related to fund management.

3rd Person in addition to Principal Officer and Compliance Officer

(i) graduation from a university or an institution recognized by the Central Government or any State Government or a foreign university; and

(ii) an experience of at least two years in related activities in the securities market including in a portfolio manager, stock broker, investment advisor or as a fund manager


Moving distributors from upfront to trail model: Portfolio managers can engage only those distributors (whether known as Channel Partners, Agents, Referral Interfaces or by any other name), who either have a valid AMFI registration number or have cleared the NISM series V-A exam and those who will follow proper code of conduct as specified. The fees or commission paid to such distributors should only be on trail-basis rather than upfront and have to be paid from the fees received by Portfolio Managers. Clients should be informed regarding the fee structure and commission that would be paid from their fees.


The changes in the PMS Regulations will bring standardization for the PMS industry. Clients of PMS will be able to better understand and compare the terms of services offered by various Portfolio Managers. The more information available in the public domain, the more it will guide investors and stakeholders what is happening.

 

 

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