On August 25, 2020, the Securities and Exchange Board of India (“SEBI”) issued ‘Frequently Asked Questions (FAQ)- Portfolio Managers’ (“FAQs”). The FAQs, inter alia, contain the following clarifications:
SEBI (Portfolio Managers) Regulations, 2020 (“PM Regulations”) provide that the portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount or a performance-based fee or a combination of both. However, no upfront fees shall be charged by the portfolio manager directly or indirectly to the clients.
There is no requirement for prior approval. However, the portfolio manager is required to inform SEBI of any proposed material change, including change in status or constitution or control, which may have a bearing on the registration. The portfolio manager shall submit such information to SEBI at least 30 (thirty) days prior to the change or as and when the decision for such change is approved by the directors/partners, whichever is earlier.
An active breach due to investor action, subsequent to corporate actions like subscription to rights issue, which results in breach of 25% (twenty five percent) limit applicable to non-discretionary portfolios, shall be considered as non-compliance. However, a passive breach due to corporate actions like bonus with respect to value of unlisted securities will not be considered as non-compliance.
Clients of portfolio managers on-boarded before January 21, 2020 shall, in case of any top-up, comply with the requirement of new minimum investment amount and top up their accounts to minimum Rs. 50,00,000 (Rupees fifty lac). The client is not required to top up his account if the portfolio value falls below the minimum investment amount as provided in the PM Regulations as a result of valuation of portfolio.
The client may withdraw partial amounts from his portfolio, in accordance with the terms of the agreement between the client and the portfolio manager. However, the value of investment in the portfolio after such withdrawal shall not be less than the applicable minimum investment amount.
Charges for all transactions in a financial year (broking, demat, custody etc.) through self or associates shall be capped at 20% (twenty percent) by value per associate (including self) per service. Such limits shall apply separately for demat services, custodian services etc. Further, any charges to self/associate shall not be at rates more than that paid to the non-associates providing the same service.
The performance of a discretionary portfolio manager is calculated using time weighted rate of return (“TWRR”) method for the immediately preceding 3 (three years) or period of operation, whichever is lesser. The time-weighted rate of return breaks up the return on an investment portfolio into separate intervals, based on whether money was added or withdrawn from the fund. The detailed calculation and an indicative illustration is provided in Annexure 1 to the FAQs.
An indicative illustration for calculation of performance fee, considering high watermark principle, is provided in Annexure 2 to the FAQs.
Portfolio managers cannot impose a lock-in on the investment of their clients. However, a portfolio manager can charge applicable exit fees from the client for early exit as laid down in the agreement subject to provision of SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/26.
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.
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. Further, SEBI also does not certify the accuracy or adequacy of the contents of the disclosure document.
Please find a copy of the FAQs here.
This update has been contributed by Adity Chaudhury (Partner) and Kshitija Naik (Associate).
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