OPERATIONAL ASPECTS OF INVESTMENT MANAGEMENT

Operational Aspects of Investment Management

• Investors and the Investing Process: Investors can be broadly classified into individual investors (e.g., resident individuals, Hindu Undivided Family (HUF), Non-Resident Indians (NRIs)) and institutional investors (e.g., companies, trusts, charitable organizations).
• Eligible Investors: The following entities can invest in financial products, subject to limits and restrictions:
  • Resident Individuals
  • Hindu Undivided Family (HUF)
  • Minors through guardians
  • Registered societies and clubs
  • Non-resident Indians (NRI)
  • Persons of Indian Origin (PIO)
  • Banks
  • Financial institutions
  • Association of persons
  • Companies
  • Partnership firms
  • Trusts
  • Foreign Portfolio Investors (FPIs)
  • Insurance companies
  • Pension funds
  • Mutual funds
• Client On-boarding Process: Investors must fulfill certain mandatory requirements, such as:
  • Know Your Customer (KYC): Verification of identity and maintenance of records
  • Permanent Account Number (PAN): Mandatory for most financial transactions
  • Application Supported by Blocked Amount (ASBA): Facility for blocking funds in a bank account for public issue applications
• Terms of Offer: The offer document of a financial product specifies conditions to be fulfilled by prospective investors, such as:
  • Eligibility criteria
  • Investment limits
  • Documentation requirements
• Regulatory Requirements: Investors must comply with regulatory requirements, including:
  • PAN: Mandatory for most financial transactions
  • KYC: Verification of identity and maintenance of records
• Mandatory Investor Information: Application forms must include certain mandatory fields, such as:
  • Name: Investor's name, which is used to create investment records
  • Signature: Verified for every transaction
  • Address: Mandatory for physical identification of the investor's location
  • Bank Account Information: Required for crediting interest, dividends, and redemption proceeds
  • PAN: Compulsory for all categories of investors, barring some exempted small-value transactions
  • KYC Compliance: Proof of being KYC compliant must be provided at the time of making the investment
  • Risk Profiling: Mandatory for investment advisers to undertake risk profiling of the investor

Operational Aspects of Investment Management

• Investor Folio or Account: A unique identifier assigned to an investor at the time of initial purchase or account opening, used to record all transactions related to the investment.
• Folio or Account Details: Includes investor information such as name, status, contact details, bank account information, mode of holding and operating the account, and nomination details.
• Additional Investments: Investments made in an open-ended mutual fund scheme after the initial investment, which can be made in a lump sum or through a systematic investment plan.
• Transaction Slips: Forms used to carry out various transactions such as additional purchases, switch transactions, and redemptions in an existing folio, requiring minimal details to be filled in by unit holders.

PAN and KYC Process

• Permanent Account Number (PAN): A unique identification number issued by the Income Tax authorities, required for most financial market transactions.
• PAN Exemptions: Certain mutual fund transactions, such as micro investments up to Rs. 50,000, are exempt from the requirement of submitting a PAN.
• Know Your Customer (KYC) Process: A procedure to verify the identity of investors, involving proof of identity and proof of residence, to prevent illegal funds from being routed into Indian markets.
• KYC Registration Agency (KRA): An agency that facilitates the KYC process for investors, with the option to use e-KYC services and UIDAI authentication.
• e-KYC and Technology: The use of technological innovations, such as eSign, e-documents, and electronic signatures, to facilitate online KYC and simplify the investment process.
• Benefits of e-KYC: Allows for online submission of documents, in-person verification through video, and online submission of documents under eSign, making the KYC process easier and more convenient for investors.

Operational Aspects of Investment Management

• Introduction to KYC: The Know Your Customer (KYC) process is a crucial aspect of investment management, enabling intermediaries to verify the identity and address of clients. This process can be completed online, reducing paperwork and saving time.
• Aadhar Based KYC: Investors can follow a detailed procedure for Aadhar-based KYC, which involves a KYC User Agency (KUA) and sub-KUA. Investment advisers can register as sub-KUAs, allowing for easier online onboarding of clients.
• In-Person Verification (IPV): For first-time investors, IPV is a mandatory step, requiring the intermediary to verify the client's identity and address. The officials of the asset management company and distributors who are compliant with KYD norms are eligible to conduct IPV.
• Video In-Person Verification (VIPV): Intermediaries can undertake VIPV of individual investors through their app, following a specific process, including obtaining informed consent, storing activity logs, and ensuring the video is clear and recognizable.
• KYC for NPS: Investors subscribing to the National Pension System (NPS) will have their KYC process conducted by Points of Presence Service Providers (POP-SP), who will verify the investor's identity and address.
• SEBI Directive on Inclusive Digital KYC: SEBI has mandated that digital KYC processes be inclusive and accessible to persons with disabilities, including those with visual impairments.
• Uniform KYC Process: SEBI has introduced a uniform KYC procedure for compliance by clients, eliminating the need for duplicate KYC processes with multiple intermediaries.
• Central KYC Record Registry: The Central Registry of Securitisation and Asset Reconstruction and Security Interest of India (CERSAI) acts as the Central KYC Record Registry, storing and retrieving KYC records in digital form.
• Dematerialisation and Re-materialisation of Securities: A depository holds securities in electronic form, allowing investors to hold and transact securities without physical certificates. The Depositories Act of 1996 and SEBI regulations govern the dematerialisation process.

Operational Aspects of Investment Management

• ISIN (International Securities Identification Number): A 12-character long identification code with three components - a prefix, a basic number, and a check digit.
• Dematerialisation: The process of converting physical securities into electronic form, involving the investor, DP, issuer/R&T agent, and depository.
• Dematerialisation Request Form (DRF): A form submitted by the investor to the DP to initiate the dematerialisation process.
• Rematerialisation: The process of converting electronic holdings of a security to physical form.
• Rematerialisation Request Form (RRF): A form submitted by the investor to the DP to initiate the rematerialisation process.
• Power of Attorney (PoA): A document that grants authority to someone to act on behalf of the investor, typically used by non-resident investors or those who want their brokers/advisors to manage their investments.
• General Power of Attorney: Gives the agent broad authority to handle all affairs, including banking, tax returns, property management, and contracts.
• Specific Limited Power of Attorney: Grants authority for specific acts or tasks, such as buying/selling securities or managing real estate.
• Non-Resident Indian (NRI): An individual who is a citizen of India or of Indian origin but not a resident of India, as defined under the Income Tax Act and FEMA regulations.

Key Concepts

• Dematerialisation involves verifying the DRF, checking the certificates, and updating the Register of Members.
• Rematerialisation involves validating the RRF, verifying the information, and printing new certificates.
• Power of Attorney must be typed on non-judicial stamp paper, stamped, signed, and notarized to be valid.
• NRIs are defined based on their residential status, which is determined under the Income Tax Act and FEMA regulations.
• FEMA (Foreign Exchange Management Act): Regulates foreign exchange transactions in India, including investments by NRIs.
• Person of Indian Origin (PIO): An individual who has held an Indian passport, is a grandchild of citizens of India, or is a spouse of an Indian citizen.
• Residential Status: Determines whether an individual is a resident or non-resident of India, based on their physical presence in the country.

Operational Aspects of Investment Management (Part 5)

• Introduction to NRI Investments: Persons of Indian Origin and FPIs are allowed to invest in India, with key issues pertaining to repatriation of investment proceeds.
• Repatriation Norms: Repatriation norms vary depending on the source of funds, with foreign currency being repatriable and Indian Rupees being non-repatriable.
• Source of Funds: The source of funds must be identified at the time of making the investment, with the bank account used to determine the source.
• Bank Accounts for NRIs: NRIs can have different types of bank accounts, including Non Resident External (NRE) Account, Foreign Currency Non Resident (FCNR) Account, and Non-Resident Ordinary (NRO) Account.

Key Concepts for NRI Investments

• Repatriation Basis: Investments made from NRE or FCNR accounts can be freely repatriated, while investments made from NRO accounts are repatriable only to the extent of USD 1 Million per financial year.
• Income Earned in India: All incomes earned in India on investments are freely repatriable, provided taxes have been paid.
• KYC for NRIs: NRIs must be KYC compliant to make investments in India, with additional documentation required, including certified true copies of passport, overseas address, and PIO card (if applicable).

Portfolio Investment (NRI) Scheme (PINS) Account

• Definition: A scheme of the Reserve Bank of India (RBI) for NRIs and PIOs to purchase and sell shares and convertible debentures of Indian companies or units of domestic mutual funds.
• Requirements: NRIs must open a separate PINS account for trading in shares, with only one PINS account allowed at a given point in time.
• Documents Required: Copy of current passport, valid work permit or employment visa, PIO card (if applicable), and address proof.

NRI Demat Account

• Definition: A demat account that can be opened by NRIs with any Depository Participant in India.
• Requirements: NRIs must mention the type (‘NRI’) and sub-type (‘Repatriable’ or ‘Non-Repatriable’) in the account opening form.
• Separate Demat Accounts: NRIs must open separate demat accounts for holding ‘repatriable’ and ‘non-repatriable’ securities.

NRI Trading Account

• Definition: A trading account that can be opened by NRIs with a registered broker of a stock exchange.
• Requirements: NRIs can have two separate trading accounts linked to NRE and NRO accounts.
• Special Considerations: NRIs cannot trade in securities which are in the breach list, and clear funds should be available for purchases.

Process of Consolidating, Reorganising, and Folio Keeping

• Introduction: Investor accounts and folios require maintenance for changes to the details provided at the time of opening an account.
• Change of Address and Contact Details: The KYC process must be undertaken to update the investor records, with supporting documents verified and necessary changes made.
• Importance of Updating Records: Updating records is crucial to ensure that investor information is accurate and up-to-date.

Operational Aspects of Investment Management

• Change of Address: Investors must update their address with the KRA (KYC Registration Agency) by providing proof of the new address, such as a passport, current utilities bill, or other approved address proof documents.
• Key Considerations:
  • Intimation to the Asset Management Company, Registrar and Transfer Agent, DP (Depository Participant), Broker, or PMS (Portfolio Management Services) provider is not sufficient unless the change is updated in the KYC records.
  • Investors must provide self-attested documentary proof of the new address.
  • Banks follow a system of periodic updation of account holder records.
• Change in Name:
  • Investors may request a change of name in their investment records or folio.
  • The request must be supported by a name change certificate issued by a regulatory authority, an official gazette copy announcing the new name, and a marriage certificate (if applicable).
• Change in Status:
  • Investors who undergo a change in status from resident to non-resident or vice versa must inform the investment companies and financial service providers.
  • The change in status will imply a change in the type of bank accounts, tax implications, and address recorded under the KYC process.
• Marking a Lien:
  • Investors may pledge their investments as collateral to borrow money from scheduled banks, financial institutions, or NBFCs (Non-Banking Finance Companies).
  • The lender will create a lien or charge on the securities pledged with them.
  • The investor cannot redeem the securities under lien until the lien holder provides written authorization to revoke the lien or pledge.
• Transmission:
  • Transmission refers to the process of passing on investments to another person on the death of the investor.
  • The process involves removing the name of the investor from investment records and transferring the investment to persons entitled to receive them.
  • The eligibility of claimants to get the investments transmitted in their name depends on the way the investment account was held (e.g., jointly, singly, with nomination, or without nomination).

Operational Aspects of Investment Management (Part 7)

• Transmission of Investments: In the event of an investor's death, the legal heirs may need to obtain a succession certificate from court, provide documents establishing their relationship with the deceased, and sign an indemnity bond.
• Documents Required:
  • Succession certificate
  • Documents establishing relationship with the deceased (e.g., birth certificate, marriage certificate)
  • Indemnity bond
  • No Objection Certificate (NoC) from remaining legal heirs
  • Bank account details of the new first holder
  • KYC compliance documents of the person receiving the transmission
• Nomination and Change in Nomination:
  • Nomination is a facility allowing investors to designate who will receive the benefits of their investments in the event of their death.
  • Nomination can be made at the time of investment or subsequently.
  • Investors can change or cancel their nomination at any time.
  • All joint holders must sign to make, change, or cancel a nomination.
• Rule of Survivorship:
  • In joint accounts, upon the demise of one or more joint holders, the assets will be transmitted to the surviving holder(s).
  • The surviving member(s) will receive the assets as owner(s), not as a trustee.
• Simultaneous Passing Away of Joint Holders:
  • If all joint holders pass away simultaneously, the assets will be transmitted to the registered nominee(s).
• Assignment:
  • Assignment refers to the transfer of an individual's rights or property to another person.
  • Assignment can occur in various areas, including investments, loans, and insurance policies.
• Change in Status of Special Investor Categories:
  • Minors: Investors under 18 years of age, who require a guardian to conduct financial transactions on their behalf.
  • NRIs (Non-Resident Indians): Investors who are not resident in India, who may need to follow specific procedures when returning to India.
  • Investors investing through a constituted attorney: Investors who use a power of attorney to conduct financial transactions.
• Minors as Investors:
  • Minors cannot enter into contracts, so financial transactions are conducted by their guardians.
  • Additional documents are required when investing on behalf of minors, including proof of age and relationship with the guardian.
  • Minors can be sole holders or first holders of investments, but not joint holders.
• Minor Turned Major:
  • When a minor becomes a major (18 years old), they must complete the KYC process and provide proof of identity and address.
  • Bank accounts, demat accounts, and mutual fund investments must be updated to reflect the change in status.
  • Systematic transactions (e.g., SIP, SWP, STP) may be suspended until the documents are received.
• NRI to Resident Indian (RI):
  • When an NRI returns to India and becomes a resident, they must inform their bank and open a Resident Rupee Account.
  • They may need to close their NRO/NRE/FCNR (B) accounts and open a new account.

Operational Aspects of Investment Management

• Change of Status: When an NRI returns to India, they need to inform the designated authorised dealer branch and the DP about the change in status.
• NRE/FCNR (B) Accounts: These accounts can hold foreign currency and continue to receive funds in foreign currency from investments abroad.
• Demat Account: A new demat account with ‘Resident’ status needs to be opened, and all balances held in the NRI demat account shall be transferred to the new ‘Resident’ demat account.
• Trading Account: The broker needs to be informed about the change, and a new trading account with resident status needs to be opened.
• Mutual Fund Investments: The respective AMC needs to be informed about the status change, and a KYC change form needs to be sent to the KYC registration agency.

Change of Status from Resident Indian to NRI

• Bank Account: A Resident Indian needs to open a Non Resident External (NRE)/ Non Resident Ordinary (NRO) account with the Bank when their status changes to NRI.
• Demat Account: A new depository account with NRI status needs to be opened, and all balances held in the account with ‘Resident’ status should be transferred to the new account.
• Trading Account: A new trading account needs to be opened for future investments, and NRI trading accounts usually have higher brokerage rates compared to resident investors.
• Mutual Fund Investments: The NRI needs to inform the relevant AMCs about the change of status, and a KYC change form needs to be sent to the KYC registration agency.

Addition or Deletion of Name in an Account

• Bank Account: A name can be added or deleted from the bank account by following a simple procedure, and the KYC will be completed for the person being added.
• Mutual Fund Investment: Mutual funds do not usually allow for addition of a name, and the solution is to open a new folio with the desired holdings.

Addition or Deletion of a Bank Mandate

• Bank Mandate: The bank mandate can be changed by adding a new bank or removing an existing one, and a form with the details of the bank account needs to be filled in.
• Mutual Funds: There is a form that allows for multiple bank accounts to be linked to a folio, and one of the accounts would be designated as the main account.

Payment Instruments

• Accepted Modes of Payment: Local cheques, at par cheques, demand drafts, post-dated cheques, electronic and digital payment modes, standing instructions, and cash are accepted modes of payment.
• Electronic Payment Modes: Automated Clearing House (ACH), Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), and Applications Supported by Blocked Amount (ASBA) are electronic payment modes.

Traditional Modes of Making Payment

• Cheques: Local cheques and at par cheques are accepted as payment, but out-station cheques and post-dated cheques (except for SIPs) are not permitted.
• Demand Drafts: Demand drafts are accepted as payment for applications from centres where the producer does not have an office or collection centre.

Digital Payment Systems

• ACH: The investor needs to submit the bank account details, and the ACH mandate form needs to be filled in and submitted with the application.
• ASBA: ASBA is an application containing an authorization to block the application money in the investor’s bank account for subscribing to a primary market issue.
• Electronic Fund Transfer: Electronic fund transfer modes such as NEFT/RTGS allow transfer of funds electronically from the account of the remitter to a beneficiary in his account maintained with another bank/branch.

Operational Aspects of Investment Management

• Payment Modes: NEFT and RTGS are two primary modes of electronic payment. NEFT transactions are processed in batches, while RTGS transactions are settled in real-time.
• Charges: NEFT charges range from Rs. 5 to Rs. 25 per transaction, while RTGS charges range from Rs. 5 to Rs. 55 per transaction. Goods and Services tax is applicable on these charges.
• Other Digital Payments: Unified Payment Interface (UPI), Aadhaar Enabled Payment Service (AEPS), National Unified USSD Platform, and E-wallets are other digital payment options available to individuals.

Prevention of Money Laundering Act

• Cash Investments: SEBI permits cash investments in mutual funds up to Rs. 50,000 per investor per mutual fund per financial year.
• Compliance: Cash applications must comply with the Prevention of Money Laundering Act, 2002, and SEBI rules and circulars.
• Third-Party Payments: Third-party payments are not accepted, except in cases where grandparents/parents make payments for minors, employers make payments for employees, or custodians make payments for FPIs.

Prevention of Frauds

• Investor Protection: Investors must ensure that their investments are safe from fraud by using electronic modes of payment and verifying the authenticity of payment requests.
• Bank Account Linking: Linking a bank account to an investment account helps prevent fraud by ensuring that dividends and redemption proceeds are credited to the correct account.

Documentation for Investment Advice

• Agreement: Investment advisers must enter into an agreement with clients, outlining roles, responsibilities, scope of work, and remuneration.
• Client Information: Advisers must collect and verify client information, including age, income, assets, liabilities, and goals.
• Risk Profiling: Advisers must assess clients' risk tolerance using risk profiling tools and communicate the results to clients.
• Investment Product Selection: Advisers must document the process of selecting investment products, including parameters considered and reasons for selection.
• Record Maintenance: Advisers must maintain records of client information, investment advice, and transactions for a period of five years.

Most Important Terms and Conditions (MITC)

• Investment Adviser (IA) Responsibilities: IAs must only accept payments for investment advisory services and not accept funds or securities on behalf of clients.
• No Guarantee of Returns: IAs must not guarantee returns, accuracy, or risk-free investments.
• Prohibited Schemes: IAs must not offer assured/guaranteed/fixed returns schemes or any other prohibited schemes.
• Disclosure and Undertaking: IAs must disclose and obtain undertakings from clients for services not under SEBI's purview.
• Fee Structure: IAs must charge fees subject to SEBI's prescribed limits and disclose fee structures to clients.
• Refund and Breakage Fee: IAs must refund proportionate fees in case of premature termination and retain a maximum breakage fee of one-quarter of the fee.

OPERATIONAL ASPECTS OF INVESTMENT MANAGEMENT (Part 10)

• Client Information: Clients are required to share their financial information (e.g. income, existing investments, liabilities, etc.) with the Investment Adviser (IA).
• Risk Profiling and Suitability Analysis: The IA is required to carry out the client’s risk profiling and suitability analysis before providing services and thereafter on an ongoing basis.
• Conflict of Interest Management: The client or the client’s family members will not be provided any distribution services by IA or any of its group entity/ family members. IA shall, wherever available, advice direct plans (non-commission based) of products only.
• Grievance Redressal:
  • Step 1: The client should first contact the IA using the details on its website or following contact details.
  • Step 2: If the resolution provided by IA is unsatisfactory, the client can lodge grievances through SEBI’s SCORES platform at www.scores.sebi.gov.in.
  • Step 3: If the client remains dissatisfied with the outcome of the SCORES complaint, the client may consider the Online Dispute Resolution (ODR) through the Smart ODR portal at https://smartodr.in.
• SEBI Registration and NISM Certification: The SEBI registration, enlistment with IAASB, and NISM certification do not guarantee the performance of IA or assure returns to the client.
• Client Contact Details: Clients are required to keep contact details, including email id and mobile number/s updated with the IA at all times.
• Security: The IA shall never ask for the client’s login credentials and OTPs for the client’s Trading Account, Demat Account and Bank Account.

Investing in Mutual Funds through the Stock Exchange Platform

• Introduction: Investing in mutual funds has spread far and wide, and one way of transacting in mutual fund units is to use the services of a distributor or complete the process with the mutual fund directly, or through the stock exchange platform.
• Stock Exchange Platforms: Recognised stock exchanges offer the facility to investors to buy and sell MF units through their platform, providing an element of convenience and seamlessness.
• Features:
  • The distributor has to be registered with Association of Mutual funds in India (AMFI) to use the infrastructure.
  • The units are purchased from and redeemed with the Asset Management Companies (AMC) directly.
  • The distributor only handles the transactions of the investor, while the rest of the process takes place through the stock exchange infrastructure.
  • The system eliminates counterparty risk.

Role of Investment Adviser

• Guidance: The investment adviser can advise on the use of the online platform for mutual fund investments and guide the investor on the process.
• Portfolio Construction: The investment adviser can suggest the route that the investor can take for making the investment, considering the convenience of the investor.
• Transaction Feed: The stock exchange provides the details of the holdings of the investor, along with the transactions that have taken place, allowing the investment adviser to take an independent view of the portfolio.

Benefits for Investment Advisers

• Single Place for Portfolio Details: The investment adviser can see the entire mutual fund portfolio of their clients at a single place.
• Transaction Status: The status of various transactions can be seen on the platform.
• Portfolio Holding Statement: The portfolio holding statement can be generated as and when required.
• Facilities: The platform offers facilities such as clubbing of family members together and changing non-financial information of the client.
• Decision-Making: The investment adviser can make decisions based on the wealth of information available.
• Smooth Process: The process is almost paperwork-free, making it smooth and allowing the investment adviser to undertake a larger amount of business and service their clients better.
• Effective Transparency: The platform ensures effective transparency for everyone present in the process, allowing the investment adviser to charge fees in the right manner and at the correct point.
• Ease of Payment: Payments are accepted through various modes, including cheque, demand draft, electronic modes like NEFT/RTGS, internet banking, and debit card.