Portfolio Managers Guidelines: Implementation timeline extended

On account of the market events due to COVID-19, the Securities and Exchange Board of India (“SEBI”) has by its Circular dated June 29, 2020 further extended the timeline to implement the Guidelines prescribed by it for portfolio managers (“PM”) under its circular dated February 13, 2020. PMs will now be required to comply with the said guidelines from October 1, 2020.

As you would be aware that SEBI had on January 16, 2020 notified the SEBI (Portfolio Managers) Regulations, 2020 (the “2020 Regulations”) which replaced the erstwhile SEBI (Portfolio Managers) Regulations, 1993 (“1993 Regulations”) in its entirety, and brought significant changes to the portfolio management space. In addition to the 2020 Regulations, SEBI has also issued the said February 13, 2020 circular which prescribed certain guidelines for PMs in relation to fees and charges, direct on-boarding of clients, investment approaches offered by PMs, revised periodic reporting’s by PMs to SEBI and its clients, clarifications relating to performance of PMs, scope of material change under the 2020 Regulations and clarifications relating to availing of services of distributors. Such guidelines were to earlier come into force on May 1, 2020 and have now been extended to October 1, 2020.

Certain key changes introduced by SEBI under the 2020 Regulations, which are currently in force, are also noteworthy :

a. Increase in net-worth requirements: The minimum net worth requirement of a PM has been raised from INR 20 million to INR 50 million. All existing PMs have been provided a period of thirty-six months from January 2020 to meet this requirement.

b. Increase in the minimum investment amount by clients: The minimum investment amount which can be accepted by a PM from its client (by way of funds or securities) has been increased from INR 2.5 million to INR 5 million. The revised minimum investment amount is applicable for all new clients, as well as fresh investments by existing clients of PMs.

c. Revised Personnel requirements:

i. Principal officer: The principal officer has now been defined as the person who will be responsible for the decisions made by the PM for the management or administration of portfolio of securities or the funds of clients, and all other operations of the PM. While the earlier requirement of the principal officer having 10 years of relevant experience has now been reduced to 5 years, at least 2 years of such experience is required to be in portfolio management or investment advisory services or in the areas related to fund management. Now the principal officer is also required to obtain relevant NISM certification.  For existing PMs, SEBI has provided a period of 3 years for its principal officers to meet such requirements. Further, any employee of the PM who has decision making authority related to fund management is also required to meet the same minimum qualifications and experience requirements applicable for a principal officer.

ii. Compliance officer: Details of the compliance officer of the PM are now required to be submitted to SEBI along with the registration applications. SEBI has also specifically clarified that the role of compliance officer cannot be assigned to the principal officer or the additional employee of the PM.

iii. Additional employee: In addition to the principal officer and compliance officer, the PM is required to have in its employment at least one other person who is required to meet the certain qualification and experience requirements. The earlier requirement of such an employee having 5 years of relevant experience has now been reduced to 2 years, which also includes experience in investment advisory activities. All existing PMs have been provided a period of 1 year to meet such requirement.

d. Investment approach: SEBI has introduced a new concept of “investment approach” offered by the PM, which details are required to be covered in any documentation issued by the PM. Implementation of requirements under the said Guidelines in this regard has been extended to October 1.

e. Revisions in documentation with client:

i. Agreement with clients: The portfolio management agreement (PM Agreement) with the client is now required to have details of the ‘investment approach’ offered by the PM. Further the PM Agreement must upfront provide for the specified period of the agreement (in years), terms of termination and provisions for renewal, in case of renewable agreements.

ii. Disclosure Document: The Disclosure Document can now be shared with the client at the time execution of the PM Agreement (as opposed to 2 days prior to the execution of the PM Agreement under the 1993 Regulations). The Disclosure Document is required to provide details of investment approaches, details of risks specific to each investment approach, details of conflicts of interest, range of fees charged under various heads, audit observations of the preceding last 3 years, etc. Performance of the PM is now required to be calculated using the ‘time weighted rate of return’ method.

f. Revisions in permissible investments and restrictions:

i. General restrictions: Every PM is now required to follow investment restrictions, such as (i) investment in units of mutual funds should be only through direct plan, and the client can not be charged any kind of distribution related fees for such investments, (ii) clients’ funds cannot be invested in a portfolio managed or administered by another PM,  (iii) client’s fund cannot be invested based on advice of any other entity, and  (iv) off market transfers in client’s account can be made only for certain exceptions.

ii. Discretionary portfolio managers: Discretionary PM are now permitted to invest clients funds only in securities which are listed or traded on a recognized stock exchange, money market instruments, units of mutual funds and other securities as specified by SEBI from time to time.

iii. Non-discretionary portfolio managers: PMs offering non-discretionary or advisory services to clients are permitted to invest or provide advice for investment up to 25% of the AUM in unlisted securities, in addition to the securities permitted for discretionary portfolio management.

Authors:

Rushabh Maniar, Partner
Sonali Ladha, Associate

Date: July 8, 2020