Chapter 7: Role of Portfolio Managers
Spectrum of Portfolio Management Services in India
Under Regulation 2 of the SEBI (Portfolio Managers) Regulations, 2020, portfolio management services are categorized into three distinct operational models based on the degree of investment discretion granted to the manager:
PMS Operational Classifications
| DISCRETIONARY PMS | NON-DISCRETIONARY PMS | ADVISORY PMS | ||
|---|---|---|---|---|
| • Manager has FULL AUTHORITY | • Manager provides analysis | • Manager provides non- | ||
| to make and execute | and recommendations. | binding investment advice. | ||
| investment decisions. | • Client retains DECISION | • Client executes trades | ||
| • No prior client consent | power; prior consent needed | independently through their | ||
| required per trade. | before every single trade. | own selected stockbrokers. | ||
| • Primary institutional route | • Execution handled by PMS | • No custody or trade | ||
| (90%+ of Indian PMS AUM). | once approved by client. | execution by manager. |
Detailed Comparison of PMS Models
| Parameter | Discretionary PMS | Non-Discretionary PMS | Advisory PMS |
|---|---|---|---|
| Investment Decision Maker | Portfolio Manager (sole discretion). | Client (prior consent required for every buy/sell). | Client (sole discretion). |
| Trade Execution | Portfolio Manager executes directly via pooled or individual orders. | Portfolio Manager executes upon receiving client confirmation. | Client executes independently via their own broker. |
| Demat & Bank Control | Managed under Power of Attorney (POA / DDPI) by Manager/Custodian. | Managed under Power of Attorney; trades executed only after confirmation. | Entirely under client control; manager has zero trading authorization. |
| Suitability | Ideal for busy HNIs seeking hands-off professional management. | Suitable for clients wanting expert research but retaining veto power. | Ideal for institutional clients or family offices executing in-house. |
| Fee Structure | Management Fee + Performance Fee (Carried Interest above hurdle). | Predominantly fixed management fee; rarely includes performance fee. | Pure advisory fee (fixed retainer or basis points on assets under advice). |
Institutional Architecture of a SEBI-Registered Portfolio Manager
To obtain and maintain registration under the SEBI (Portfolio Managers) Regulations, 2020, an entity must satisfy stringent structural and personnel benchmarks:
| Regulatory Parameter | Statutory Mandate |
|---|---|
| Minimum Net Worth (Capital Adequacy) | ₹5 Crores (continuously maintained) |
| Principal Officer Qualification | Professional degree (Finance/CA/CFA/MBA) + 5 years relevant capital markets exp. |
| Mandatory Certification | NISM-Series-XXI-A (for Distributors) NISM-Series-XXI-B (for Portfolio Managers) |
| Compliance Officer | Mandatory designated compliance officer |
| Custodian Appointment | Mandatory independent SEBI custodian |
Roles and Fiduciary Liabilities of Key Personnel
- The Principal Officer: A director or key managerial personnel designated by the portfolio manager to oversee investment decision-making. Must possess professional finance qualifications and at least five years of experience in related securities market activities.
- The Compliance Officer: Reports independently to the Board of Directors, tasked with ensuring total adherence to SEBI regulations, client agreements, disclosure documents, code of conduct, and anti-money laundering (PMLA) mandates.
- The Custodian: An independent entity mandated to safe-keep client securities, settle trades, collect dividends, and ensure absolute segregation between the portfolio manager’s own assets and client funds.
Fiduciary Code and Client Portfolio Administration
A portfolio manager acts in a high-fiduciary capacity toward clients, legally bound to uphold the highest standards of integrity, transparency, and fairness:
| Core Fiduciary Duties of the PMS | Details 2 | Details 3 | Details 4 | Details 5 |
|---|---|---|---|---|
| High Standard of Integrity | Absolute Asset Segregation | Proscription on Self-Dealing | ||
| Acting strictly in the best | Client bank and demat accounts | No borrowing from client, no | ||
| interest of clients; no | completely segregated from | un-agreed cross-trades, no | ||
| misleading statements | the manager's corporate funds | front-running or churning |
Operational Governance in Client Administration
- Segregation of Accounts: Client securities and funds must be held strictly in designated individual client demat and bank accounts (or segregated client custody accounts). The manager cannot commingle client funds with proprietary capital.
- Prohibition on Speculative Borrowing and Lending: A portfolio manager cannot borrow funds on behalf of clients or pledge client securities to raise leverage.
- Execution Integrity and Allocation: Where transactions are executed collectively for multiple clients under an Investment Approach, executions must be allocated on a strict, pro-rata basis at the Volume-Weighted Average Price (VWAP), preventing preferential cherry-picking.
Educational & Regulatory Disclaimer: TradeKaizen is an educational platform dedicated to financial literacy and NISM certification examination preparation. TradeKaizen is NOT a SEBI-registered Investment Adviser (IA), Research Analyst (RA), Portfolio Manager, or Broker. Content, visual diagrams, mathematical formulations, option strategies, and simulated market scenarios are provided strictly for educational and certification training purposes only. Nothing herein should be construed as investment, legal, or taxation advice, nor as a recommendation, endorsement, or solicitation to buy, sell, or hold any security, derivative, or financial instrument.