FINANCIAL MARKETS AND REGULATORY SYSTEMS

AN OVERVIEW OF THE SEBI (PORTFOLIO MANAGERS)

REGULATIONS, 1993
(Assignment submitted towards evaluation in the subject of Financial Markets and
Regulatory Systems)

SUBMITTED BY: Avantika Arun

Roll No. 1178
B.Sc., LL.B. (Business Law Hons.)
Semester VII
SUBMITTED TO: Ms. Varendyam Jahnawi Tiwari
Faculty of Law

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION
(JULY NOVEMBER 2017)
INTRODUCTION

A portfolio essentially refers to the total holdings of securities belonging to any person.
Portfolio management has been acknowledged as the coordinated management of portfolio
components to achieve specific organizational objectives. It is a technique for optimizing the
organizational returns from project investments by improving the alignment of projects with
strategy and ensuring resource sufficiency. It aims to optimize the outcomes from project
investment across a portfolio and it is also regarded as the governance method for selection
and prioritization of projects or programs. Organizations that do not align their project
portfolio with organizational strategies and governance will tend to increase the risks of
running projects that are low priority initiatives. As a result, there will be critical resource
shortages, and investments will not be optimised. Therefore, application of the techniques of
portfolio management within the context of organizational governance provides reasonable
assurance that the organizational strategy can be achieved.
A portfolio manager is any person 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
portfolio of securities or the funds of the client, as the case may be. 1 The Securities and
Exchange Board of India (Portfolio Managers) Regulations, 1993 regulate separately
managed accounts in India. Under the PMS Regulations, the portfolio manager advises,
directs or undertakes on behalf of its client the management or administration of a portfolio
of securities or the funds of the client pursuant to a contract or arrangement with the client
and the underlying assets are held by the clients directly. Portfolio management services
under the PMS regulations can be discretionary (where the portfolio manager has the
discretion to make investments) and non-discretionary (where the discretion lies with the
clients). Foreign Portfolio Investors registered under the FPI Regulations may also avail
themselves of the services of a portfolio manager. The portfolio manager shall not accept
from the client, funds or securities worth less than twenty five lakh rupees (Minimum
Investment Amount).2
PROCESS OF REGISTRATION OF A PORTFOLIO M ANAGER

Regulation 3 states that a certificate of registration is to be granted by SEBI to any

person who wishes to serve as a portfolio manager.

1
Regulation 2(cb), SEBI (Portfolio Managers) Regulations, 1993.
2
Regulation 15(1A), SEBI (Portfolio Managers) Regulations, 1993.
 Regulation 6 states that while considering the grant of certificate of registration to the
applicant, the Board shall take into account all matters which it deems relevant to the
activities relating to portfolio management such as whether:
(a) the applicant is a body corporate;
(b) the applicant has the necessary infrastructure like adequate office space,
equipments and the manpower to effectively discharge the activities of a
portfolio manager;
(c) the principal officer of the applicant has either - (i) a professional qualification
in finance, law, accountancy or business management from a university or an
institution recognised by the Central Government or any State Government or
a foreign university; or (ii) an experience of at least ten years in related
activities in the securities market including in a portfolio manager, stock
broker or as a fund manager; (iii) a CFA charter from the CFA Institute.
(d) the applicant has in its employment minimum of two persons who, between
them, have atleast five years of experience in related activities in portfolio
management or stock broking or investment management or in the areas
related to fund management;
(e) any previous application for grant of certificate made by any person directly or
indirectly connected with the applicant has been rejected by the Board;
(f) any disciplinary action has been taken by the Board against a person directly
or indirectly connected with the applicant under the Act or the Rules or the
Regulations made thereunder;
[person directly or indirectly connected" refers to any person being an
associate, subsidiary, inter connected company or a company under the same
management within the meaning of section 370(1B) of the Companies Act,
1956 or in the same group]
(g) the applicant fulfils the capital adequacy requirements specified in Regulation
7 (capital adequacy requirements shall not be less than the networth of two
crores, and if granted registration before commencement of these Regulations,
they are mandated to raise the networth to not less than one crore in six
months, and to two crores six months thereafter;
(h) the applicant, its director, principal officer or the employee as specified in
clause (d) is involved in any litigation connected with the securities market
which has an adverse bearing on the business of the applicant;
 (i) the applicant, its director, principal officer or the employee as specified in
clause (d) has at any time been convicted for any offence involving moral
turpitude or has been found guilty of any economic offence;
(j) the applicant is a fit and proper person; [also defined in Schedule II of SEBI
(Intermediaries) Regulations, 2008 as a person with (i) integrity, reputation
and character; (ii) absence of convictions and restraint orders; and (iii)
competence including financial solvency and networth.] and
(k) grant of certificate to the applicant is in the interests of investors.
In cases where registration is not granted, refusal to grant registration shall be
communicated by the Board within thirty days of such refusal to the applicant, stating
therein the grounds on which the application has been rejected. The aggrieved
applicant may apply to the Board for reconsideration of its decision within 30 days
from the date of receipt of such intimation.
As given in Schedule II of the Regulations, along with the application, a non-
refundable payment of Rupees One Lakh is to be made.
At the time of grant of certificate, Ten Lakh Rupees is payable as registration fees.
To keep the registration in force, the portfolio manager is required to pay a fee of Five
Lakh Rupees every three years from the date of grant of certificate within three
months before expiry of the block period for which fee has been paid.
Failure to make the requisite payments may lead to suspension of certificate by the
Board, whereupon the portfolio manager shall forthwith cease to carry on the activity
as a portfolio manager for the period during which the suspension subsists.
Also, any registration granted is subject to the following conditions, under Regulation
9A:
(a) where the portfolio manager proposes to change its status or constitution, it
shall obtain prior approval of the Board for continuing to act as such after the
change (Or obtain a fresh registration under Section 12 of the SEBI Act,
1992);
(b) it shall pay the fees for registration in the manner provided in these
regulations;
(c) it shall take adequate steps for redressal of grievances of the investors within
one month of the date of the receipt of the complaint and keep the Board
 informed about the number, nature and other particulars of the complaints
received;
(d) it shall maintain capital adequacy requirements specified in regulation 7 at all
times during the period of the certificate; and
(e) it shall abide by the regulations made under the Act in respect of the activities
carried on by it as portfolio manager.
LIST OF COMPLIANCES TO BE ADHERED TO BY A PORTFOLIO MANAGER

Regulation. Time limit (if

Compliance Any other condition
No. any)
3 The portfolio manager must obtain a Conditions for
registration certificate from the Board. obtaining the same
-
in Chapter II of the
Regulations.
13 A portfolio manager should abide by
the Code of Conduct in Schedule III - -
of the Regulations.
14 Before taking up an assignment of The Disclosure -
management of funds or portfolio Document along
of securities on behalf of a client, with the
the portfolio manager should enter certificate in
into an agreement in writing with Form C should
such client clearly defining the be made
inter se relationship, and setting available atleast
out their mutual rights, liabilities two days prior to
and obligations relating to entering into an
management of funds or portfolio agreement with
of securities. the client.
A Disclosure Document is also to
be provided as specified in
Schedule V along with a
certificate in Form C as specified
in Schedule I.
Shall charge agreed fee, without
guaranteeing or assuring, either
directly or indirectly, any return
and the fee so charged may be a
fixed fee or a return based fee or a
combination of both. Fee may also
be charged for any outsourced
activity that the portfolio manager
undertakes.
16B Every portfolio manager shall appoint Not applicable to
a custodian in respect of securities portfolio managers
-
managed/administered by it. who have total
assets under
 management of
value less than
five hundred crore
rupees; or who
perform purely
advisory functions.
17 Every portfolio manager shall keep
and maintain the following books of
accounts, records and documents such
as balance sheets, profit and loss
account, auditors report, statement on
- -
financial position and any such
records with respect to investment
transactions, and intimate the place
where such records are maintained to
the Board.
18 Unaudited financial results to be Half yearly basis
furnished to the Board to ensure
-
capital adequacy of the portfolio
manager.
19 Account books, records, etc. to be
maintained by portfolio manager for a - -
minimum period of five years
20 Proper client-wise accounts to be If the portfolio
maintained by the portfolio manager, manager has
all expenses to be properly reflected in performed his
the account. Account books to be duties in
audited yearly by a qualified auditor to accordance with
ensure than proper accounting the law, a
methods have been followed. Portfolio certificate to this -
accounts of the manager shall be effect shall be
audited by an independent chartered submitted to the
accountant, and a copy given to the Board within 6
client, the portfolio manager shall co- months of close
operate with such chartered of his accounting
accountant in the course of the audit. period.
21 Portfolio manager shall furnish Such report
periodically a report to the client should be
containing details such as the furnished on a
composition and value of portfolio, timely basis, for
transactions undertaken, expenses a period not
incurred, details of risk foreseen, etc. exceeding six
-
This report shall also be made months.
available on their website. On
termination of the contract, the
portfolio manager shall give a detailed
accounts statement to the client and
settle the account with them.
22 Portfolio manager shall take steps to Within two
-
rectify deficiencies made out in the months from the
 auditors reports. date of the
auditors report
23 They shall make disclosures as and
when required with respect to
(i) Particulars regarding portfolio
management;
(ii) Any change in information
previously given, which has a
- -
bearing on certificate granted
to him;
(iii)Names of clients whose
portfolio he has managed; and
(iv) Particulars related to the
capital adequacy requirement
23A They shall appoint a compliance
officer who will be responsible for
monitoring compliance with the
applicable Act, rules and regulations
issued by the Board/Government, and - -
for redressal of investors grievances.
Any non-compliance is to be reported
to the Board immediately and
independently.

OBJECTIVES OF PORTFOLIO MANAGEMENT

The objective of portfolio management is to invest in securities is securities in such a way

that one maximizes ones returns and minimizes risks in order to achieve ones investment
objective.3
A good portfolio should have multiple objectives and achieve a sound balance among them.
Any one objective should not be given undue importance at the cost of others. Presented
below are some important objectives of portfolio management.
Stable Current Return: Once investment safety is guaranteed, the portfolio should
yield a steady current income. The current returns should at least match the
opportunity cost of the funds of the investor. What we are referring to here current
income by way of interest of dividends, not capital gains.
Marketability: A good portfolio consists of investment, which can be marketed
without difficulty. If there are too many unlisted or inactive shares in your portfolio,
you will face problems in encasing them, and switching from one investment to

3
Scope and Objectives of Portfolio Management, available at https://www.mbaknol.com/investment-
management/objectives-and-scope-of-investment-portfolio-management/
 another. It is desirable to invest in companies listed on major stock exchanges, which
are actively traded.
Tax Planning: Since taxation is an important variable in total planning, a good
portfolio should enable its owner to enjoy a favorable tax shelter. The portfolio should
be developed considering not only income tax, but capital gains tax, and gift tax, as
well. What a good portfolio aims at is tax planning, not tax evasion or tax avoidance.
Appreciation in the value of capital: A good portfolio should appreciate in value in
order to protect the investor from any erosion in purchasing power due to inflation. In
other words, a balanced portfolio must consist of certain investments, which tend to
appreciate in real value after adjusting for inflation.
Liquidity: The portfolio should ensure that there are enough funds available at short
notice to take care of the investors liquidity requirements. It is desirable to keep a
line of credit from a bank for use in case it becomes necessary to participate in right
issues, or for any other personal needs.
Safety of the investment: The first important objective of a portfolio, no matter who
owns it, is to ensure that the investment is absolutely safe. Other considerations like
income, growth, etc., only come into the picture after the safety of your investment is
ensured.
Investment safety or minimization of risks is one of the important objectives of
portfolio management. There are many types of risks, which are associated with
investment in equity stocks, including super stocks. Bear in mind that there is no such
thing as a zero risk investment. More over, relatively low risk investment give
correspondingly lower returns. You can try and minimize the overall risk or bring it to
an acceptable level by developing a balanced and efficient portfolio. A good portfolio
of growth stocks satisfies the entire objectives outline above.