Table of Contents
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:
Key Regulatory Thresholds for PMS Registration:
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│ 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 │
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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:
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│ Core Fiduciary Duties of the PMS │
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│
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┌──────────────────────────────┐ ┌──────────────────────────────┐ ┌──────────────────────────────┐
│ 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.