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Want to Avail Portfolio Management Services?- Invest More

Sikha Bansal 
on 23 April 2012

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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, the management or administration of a portfolio of securities or the funds of the client. Two classes of portfolio managers are there- discretionary portfolio manager and non-discretionary portfolio manager.

Portfolio Managers, their registration, their activities, their general obligations and responsibilities are all governed by Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993[1] as amended from time to time. The Regulations lay down minimum limits below which a portfolio manager can’t accept from the client while opening the account for the purpose of rendering portfolio management service to the client.

Recently, Securities and Exchange Board of India (SEBI) notified on February 10, 2012 Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012[2]. Highlights of the amendments are detailed below:

Rise in the minimum level of funds to be accepted from the clients:

One of the General responsibilities of a Portfolio Manager, as enumerated under Regulation 15 of the said Regulations is: “The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees” [Sub-Regulation (1A)]. The amendment regulations have hiked this limit from Rs. 5 lacs to Rs. 25 lacs. However, clarification has also been given in the form of proviso to the amended regulation, according to which:

i. The minimum investment amount per client shall be applicable for new clients and fresh investments by existing clients, and

ii. Existing investments of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012, may continue as such till maturity of the investment.

The low minimum investment amount of Rs.5 lacs made the products offered by portfolio managers accessible to retail investors without the protection which are available to retail investors under the Mutual Fund framework. Intent of the Regulator behind this substantial increase is to provide the retail investors with the same sort of protection as is available to them under the Mutual Fund framework.

Segregation of holdings in case of unlisted securities:

Regulation 16 of the said regulations deals with “Investment of clients' moneys and management of clients' portfolio of securities”. Sub-regulation (8) requires that, “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.” Now, the amendment regulations have also brought unlisted securities within the ambit of the sub-regulation. However, as specifically provided under the amended regulations:

i. The portfolio manager is required to segregate each client’s holdings in unlisted securities in separate accounts in respect of investment by new clients and fresh investments by existing clients.

ii. Existing investments in unlisted securities of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012 may continue as such till maturity of investment.

The above two changes may be traced back to the Concept Paper on Proposed Alternative Investment Funds Regulation[3] circulated by SEBI. In the Concept paper, SEBI stated that “Though SEBI has made it mandatory for portfolio managers to segregate client accounts, the services provided by many portfolio managers are standardized portfolio strategies where assets of clients are handled without customization, leading to proxy fund management through this route”. To avoid such practices, the changes have been induced in the Regulations.

Changes in MODEL DISCLOSURE DOCUMENT FOR PORTFOLIO MANAGEMENT:

The model disclosure document for portfolio management previously required name and signature of all the Directors of Portfolio Manager. Now, the amended regulations have reduced the requirement a bit. Instead of all directors, name and signature of at least two directors are required.

One can conclude that: Though SEBI intends to extend protection to retail investors in line with that available to them under the Mutual Fund framework, yet it seems that the higher investment limit will lead to the exclusion of a large number of retail and small individual investors who wish to avail of portfolio management services.

[1] SEBI (Portfolio Managers) Regulations, 1993 amended till August 11, 2008 are available at: http://www.sebi.gov.in/cms/sebi_data/commondocs/portfolioregu_p.pdf

[2] SEBI (Portfolio Managers) (Amendment) Regulations, 2012 are available at: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1328869427604.pdf

[3] The text of the Concept Paper on Proposed Alternative Investment Funds Regulation can be viewed at: http://www.sebi.gov.in/commreport/alternativeinvestment.pdf




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