Executive Summary:
This circular outlines guidelines for Portfolio Managers (PMs) based on SEBI's review and the SEBI Portfolio Managers Regulations, 2020. It addresses fees and charges, direct onboarding of clients, investment approach nomenclature, periodic reporting, performance reporting, disclosure documents, and supervision of distributors. The provisions of this circular are effective from May 01, 2020.
Key Points / Main Content:
* **Fees and Charges:**
* No upfront fees can be charged to clients, directly or indirectly.
* Brokerage will be charged at actuals.
* Operating expenses (excluding brokerage) are capped at 0.50% per annum of the client's average daily AUM.
* Exit load charges are capped based on the year of redemption (3% in year 1, 2% in year 2, 1% in year 3, and 0% after three years).
* The client agreement annexure for a sample portfolio illustration should be modified to reflect INR 50 Lacs instead of INR 10 Lacs.
* 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.
* **Direct Onboarding of Clients:**
* PMs must provide an option for clients to onboard directly, without distributors.
* This option must be prominently disclosed.
* Only statutory charges can be levied during direct onboarding.
* **Nomenclature Investment Approach:**
* Information about Investment Approaches must be consistent across all regulatory reporting, client reporting, disclosure documents, and marketing materials.
* Description of investment approach to include investment objective, types of securities, basis of security selection, portfolio allocation, benchmark, investment horizon, risks, and salient features.
* **Periodic Reporting by Portfolio Managers:**
* Annual compliance reporting to SEBI is required.
* A Chartered Accountant's certificate for net worth as of March 31st, based on audited accounts, is due within 6 months of the financial year-end.
* A compliance certificate, signed by the Principal Officer, is due within 60 days of each financial year-end, including details of non-compliance and corrective actions.
* Monthly portfolio management activity reports must be submitted to SEBI within 7 working days of each month's end using the revised format in Annexure A.
* Quarterly reports must be furnished to clients as per Annexure B.
* **Reporting of Performance by Portfolio Managers:**
* Performance calculations must include all cash holdings and investments in liquid funds.
* Performance data must be reported net of all fees, expenses, and taxes.
* Any change in investment approach impacting performance must be disclosed in marketing materials.
* Performance reported in marketing materials and the PM's website must match the data reported to SEBI.
* Firm-level performance reported in any document shall be same as the combined performance of all the portfolios managed by the Portfolio Manager.
* Marketing material must include a disclaimer that the performance information is not verified by SEBI.
* Firm-level performance data must be audited annually.
* Compliance confirmation must be reported to SEBI within 60 days of each financial year-end, certified by Directors/Partners or authorized persons.
* **Disclosure Documents:**
* Material changes include changes in control, Principal Officer, fees, charges, investment approaches, and other SEBI-specified changes.
* **Supervision of Distributors:**
* PMs must use distributors with a valid AMFI Registration Number or who have cleared the NISM Series-VA exam.
* Fees or commissions to distributors must be trail-based and paid only from fees received by the PMs.
* Prospective clients must be informed about distributor fees/commissions.
* Distributors must abide by a specified Code of Conduct (Annexure C).
* PMs must independently verify distributor compliance with the Code of Conduct.
* Distributors must provide a self-certification of compliance with the Code of Conduct within 15 days of each financial year-end.
Impact Analysis:
* **Portfolio Managers:**
* Impact: Changes in fee structure, onboarding procedures, reporting requirements, performance reporting, disclosure requirements and distributor supervision.
* Action Required: Modify fee structures, implement direct onboarding options, update reporting processes, ensure compliance with performance reporting standards, update disclosure documents, and implement distributor supervision mechanisms.
* **Clients:**
* Impact: Changes in fee structure transparency, direct onboarding option, more standardized information on investment approaches, and greater clarity on performance reporting.
* Action Required: Review portfolio management agreements, understand new fee structures, consider direct onboarding options, and evaluate investment approaches based on standardized information.
* **Distributors:**
* Impact: Need to have valid AMFI registration or pass NISM Series-VA exam, adhere to a code of conduct, and provide self-certification of compliance.
* Action Required: Obtain valid registration/certification, comply with the code of conduct, and provide annual self-certification to Portfolio Managers.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body for securities markets in India, responsible for issuing the circular.
SEBI Portfolio Managers Regulations, 2020: The primary regulations governing portfolio managers, which were notified on January 16, 2020.
Portfolio Managers: Entities regulated by SEBI that manage investment portfolios on behalf of clients.
Working Group: A group that provided recommendations to SEBI regarding the regulation of Portfolio Managers.
AMFI Registration Number: A registration number for distributors utilized by Portfolio Managers.
NISM SeriesVA exam: An exam required for distributors utilized by Portfolio Managers.
Securities and Exchange Board of India Act, 1992: The act of parliament that established SEBI and defines its powers.
Financial Year 2019-20: The financial year from which certain reporting requirements for Portfolio Managers are effective.
CIRCULAR
SEBI/HO/IMD/DF1/CIR/P/2020/26 February 13, 2020
To,
All Portfolio Managers,
Dear Sir/ Madam,
Sub: Guidelines for Portfolio Managers
1. Securities and Exchange Board of India (SEBI), based on the
recommendations of a Working Group and inputs from public consultation,
reviewed the framework for regulation of Portfolio Managers and the SEBI
(Portfolio Managers) Regulations, 2020 (“PMS Regulations”) has been
notified on January 16, 2020. (Available at Link)
2. In addition to the above, certain changes to the regulatory framework for
Portfolio Managers are mandated as under:
A. Fees and Charges
3. In partial modification to Cir. /IMD/DF/13/2010 dated October 05, 2010
on Regulation of Fees and Charges, the following is mandated:
(i) As provided in Regulation 22 (11) of the PMS Regulations, no upfront
fees shall be charged by the Portfolio Managers, either directly or
indirectly, to the clients.
(ii) Brokerage at actuals shall be charged to clients as expense.
(iii) 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).
(iv) In case client portfolio is redeemed in part or full, the exit load charged
shall be as under:
a) In the first year of investment, maximum of 3% of the amount
redeemed.
Page 1 of 6b) In the second year of investment, maximum of 2% of the amount
redeemed.
c) In the third year of investment, maximum of 1% of the amount
redeemed.
d) After a period of three years from the date of investment, no exit
load.
(v) The Annexure to the Client agreement referred in Paragraph 4 g) of the
aforementioned Circular shall be suitably modified for a sample
portfolio of INR 50 Lacs as against the present illustration for INR 10
Lacs.
(vi) 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.
B. Direct on-boarding of clients by Portfolio Managers
4. Portfolio Managers shall provide an option to clients to be on-boarded
directly, without intermediation of persons engaged in distribution
services.
5. Portfolio Managers shall prominently disclose in its Disclosure
Documents, marketing material and on its website, about the option for
direct on-boarding.
6. At the time of on-boarding of clients directly, no charges except statutory
charges shall be levied.
C. Nomenclature ‘Investment Approach’
7. The information about Investment Approaches offered by 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.
8. Any description of investment approach provided by Portfolio Managers
shall, inter-alia, include:
Page 2 of 6(i) investment objective
(ii) description of types of securities e.g. equity or debt, listed or
unlisted, convertible instruments, etc.
(iii) basis of selection of such types of securities as part of the
investment approach
(iv) allocation of portfolio across types of securities
(v) appropriate benchmark to compare performance and basis for
choice of benchmark
(vi) indicative tenure or investment horizon
(vii) risks associated with the investment approach
(viii) other salient features, if any.
D. Periodic reporting by Portfolio Managers
9. In partial modification to Circular IMD/PMS/CIR/1/21727/03 dated
November 18, 2003 on ‘Improvement in Corporate Governance’, Portfolio
Managers shall report to SEBI on compliance with the provisions of the
said Circular on an annual basis as against bi-annual submission.
10. SEBI Circular No. IMD/DOF-1/PMS/Cir-1/2010 dated March 15, 2010
stands superseded. However, with effect from Financial Year 2019-20,
Portfolio Managers shall submit the following information to the Board:
(i) 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.
(ii) A certificate of compliance with PMS Regulations and circulars
issued thereunder, 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.
11. Further, in partial modification to Cir. /IMD/DF/14/2010 dated October
08, 2010, Portfolio Managers shall submit a monthly report regarding
their portfolio management activity, on SEBI Intermediaries Portal within
Page 3 of 67 working days of the end of each month, as per the revised format
enclosed in Annexure A.
12. Portfolio Managers shall furnish a report in the format provided at
Annexure B, to their clients on a quarterly basis.
E. Reporting of Performance by Portfolio Managers
13. Further to Regulation 22 (4)(e) of PMS Regulations, it is clarified that the
Portfolio Managers shall:
(i) Consider all cash holdings and investments in liquid funds, for
calculation of performance.
(ii) Report performance data net of all fees and all expenses (including
taxes).
(iii) Clearly disclose any change in investment approach that may
impact the performance of client portfolio, in the marketing
material.
(iv) Ensure that performance reported in all marketing material and
website of the Portfolio Manager is the same as that reported to
SEBI.
(v) Ensure that the aggregate performance of the Portfolio Manager
(firm-level performance) reported in any document shall be same as
the combined performance of all the portfolios managed by the
Portfolio Manager.
(vi) Provide a disclaimer in all marketing material that the performance
related information provided therein is not verified by SEBI.
14. The firm-level performance data of Portfolio Managers shall be audited
annually. Confirmation of compliance with Paragraph 13 of this Circular
shall be reported to SEBI within 60 days of end of each financial year. The
said report to SEBI shall be certified by the Directors/Partners of the
Portfolio Manager or by person(s) authorized by the Board of
Directors/Partners of the Portfolio Manager.
Page 4 of 6F. Disclosure Documents
15. Material change, for the purpose of Regulation 22 (7) of PMS Regulations,
shall include 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.
G. Supervision of Distributors
16. Further to Regulation 23(10) of PMS Regulations, it is clarified that
Portfolio Managers shall:
(i) Utilize services of only such distributors (whether known as
Channel Partners, Agents, Referral Interfaces or by any other name)
who have a valid AMFI Registration Number or have cleared NISM-
Series-V-A exam.
(ii) Pay fees or commission to distributors only on trail-basis. Further,
any fees or commission paid shall be only from the fees received by
Portfolio Managers.
(iii) Ensure that prospective clients are informed about the fees or
commission to be earned by the distributors for on-boarding them
to specific investment approaches.
(iv) Ensure that distributors abide by the Code of Conduct as specified
in Annexure C.
(v) Have mechanism to independently verify the compliance of its
distributors with the Code of Conduct.
(vi) Ensure that, within 15 days from the end of every financial year, a
self-certification is also received from distributors with regard to
compliance with Code of conduct.
H. Applicability
17. The provisions of this Circular shall be applicable with effect from May 01,
2020.
18. This circular is issued in exercise of powers conferred under Section 11(1)
of the Securities and Exchange Board of India Act, 1992 read with the
provisions of Regulation 43 of the SEBI (Portfolio Managers) Regulations,
Page 5 of 62020, to protect the interests of investors in securities market and to
promote the development of, and to regulate the securities market.
19. This circular is available on SEBI website at www.sebi.gov.in under the
category “Circulars” and “Info for - Portfolio Managers”.
Yours faithfully,
Sanjay Singh Bhati
Deputy General Manager
+91-22-26449222
ssbhati@sebi.gov.in
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