Table of Contents
Chapter 7: Role of Portfolio Managers
7.1 Evolution, Types of PMS (Discretionary, Non-Discretionary, Advisory), and Organizational Architecture
Historical Evolution of Portfolio Management Services in India
Portfolio Management Services (PMS) in India originated to serve High-Net-Worth Individuals (HNIs), family offices, corporate treasuries, and institutional trusts requiring customized wealth management solutions beyond standardized retail mutual fund schemes.
SEBI first introduced the regulatory framework with the SEBI (Portfolio Managers) Regulations, 1993. Over the subsequent decades, structural reforms were enacted to elevate governance, enforce transparent client disclosures, and eliminate conflicts of interest. In 2020, SEBI replaced the legacy framework with the modern SEBI (Portfolio Managers) Regulations, 2020, which introduced the ₹50 Lakh minimum ticket size, rigorous net worth mandates, and strict separation between investment management and advisory operations.
Classification of Portfolio Management Services
Under SEBI regulations, a Portfolio Manager can offer three distinct categories of services, each defined by the level of decision-making authority granted by the client:
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| CLASSIFICATION OF PORTFOLIO MANAGEMENT SERVICES (PMS) |
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| Service Model | Investment Decision Authority | Trade Execution & Custody Protocol |
+-------------------------+----------------------------------+--------------------------------------+
| Discretionary PMS | Sole authority rests with the | Portfolio manager executes trades |
| | portfolio manager under a Power | directly through client's demat |
| | of Attorney (POA/DDPI) | without prior trade-by-trade approval|
+-------------------------+----------------------------------+--------------------------------------+
| Non-Discretionary PMS | Authority rests with the client; | Portfolio manager executes trades |
| | portfolio manager recommends | only AFTER receiving explicit client |
| | investments and allocations | consent for each transaction |
+-------------------------+----------------------------------+--------------------------------------+
| Advisory PMS | Purely advisory guidance; client | Client executes transactions |
| | retains 100% investment and | independently through external |
| | execution discretion | brokers and personal demat accounts |
+-------------------------+----------------------------------+--------------------------------------+
Detailed Operational Comparison
- Discretionary Portfolio Management Services:
- The investor signs a comprehensive discretionary agreement granting the portfolio manager full autonomy to invest, buy, sell, and rebalance securities on the client's behalf.
- Securities are purchased directly in the individual client's unique demat account, ensuring complete pass-through ownership.
- The manager adheres strictly to the client's agreed Investment Policy Statement (IPS) and mandated risk parameters.
- Non-Discretionary Portfolio Management Services:
- The portfolio manager conducts fundamental research, monitors market opportunities, and generates specific buy/sell recommendations for the client's portfolio.
- However, no order can be routed or executed without obtaining the client's recorded approval (written, email, or authenticated digital confirmation).
- Execution speed depends on client responsiveness, which can impact trade fills in volatile market conditions.
- Advisory Portfolio Management Services:
- The portfolio manager provides non-binding investment research, asset allocation advice, and financial planning recommendations.
- The advisory portfolio manager does not handle client funds, manage demat custody, or execute transactions.
Organizational Architecture of a Registered Portfolio Manager
To maintain internal controls and operational resilience, a SEBI-registered Portfolio Management entity is structured with clear functional separation:
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| PORTFOLIO MANAGER ENTITY ARCHITECTURE |
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| BOARD OF DIRECTORS |
| - Sets corporate governance, strategic direction, and risk management policies |
+-------------------------------------------------+-------------------------------------------------+
|
+------------------------+------------------------+
| |
v v
+---------------------------------------------------+ +-------------------------------------------+
| PRINCIPAL OFFICER | | COMPLIANCE OFFICER |
| - Responsible for overall portfolio management, | | - Independent oversight of SEBI norms, |
| asset allocation, and investment strategies | | PMLA, PIT, SDD, and client charter |
| - Meets strict regulatory qualification mandates | | - Reports directly to the Board of Dir. |
+------------------------+--------------------------+ +-------------------------------------------+
|
+------------------+------------------+--------------------+
v v v
+------------------------+ +--------------------+ +----------------------------------------+
| INVESTMENT & RESEARCH | | TRADING & DEALING | | OPERATIONS & CUSTODIAL SETTLEMENTS |
| - Fundamental Research | | - Order routing | | - Client onboarding, KYC, CKYC/KRA |
| - Valuation Models | | - Best execution | | - Reconciliations with Custodian & DP |
| - IPS Structuring | | - VWAP allocation | | - Performance fee & HWM calculations |
+------------------------+ +--------------------+ +----------------------------------------+
7.2 Eligibility, Net Worth Mandate (₹5 Cr), Principal Officer Qualifications, and Compliance Framework
SEBI Registration and Capital Adequacy Mandates
To obtain and retain a certificate of registration as a Portfolio Manager from SEBI under the SEBI (Portfolio Managers) Regulations, 2020, the applicant entity must satisfy rigorous institutional and capital criteria:
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| SEBI PMS REGISTRATION & CAPITAL REQUIREMENTS |
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| Requirement | Statutory Specification |
+-----------------------------------+---------------------------------------------------------------+
| Minimum Net Worth Mandate | ₹5 Crore (₹50,000,000) continuously maintained |
| Computation Basis | Paid-up equity capital + free reserves - accumulated losses, |
| | intangible assets, deferred tax assets, and encumbered assets |
| Registration Fee | ₹10,00,000 application fee + ₹5,00,000 renewal every 3 years |
| Certificate Validity | Permanent registration unless suspended or cancelled by SEBI |
+-----------------------------------+---------------------------------------------------------------+
The net worth must be certified by an independent practicing Chartered Accountant on an ongoing basis and submitted to SEBI in periodic compliance filings.
Professional Qualifications of the Principal Officer
Regulation 7(2) of the SEBI (Portfolio Managers) Regulations, 2020 mandates that the applicant appoint a designated Principal Officer who is responsible for the overall investment decisions of the firm:
- Educational Credentials:
- Professional degree in finance, law, accountancy, or business management from a recognized university or institute (e.g., MBA Finance, CA, CFA, CS, ICWA); OR
- Post-graduate degree or diploma in finance or related fields.
- Relevant Industry Experience:
- Minimum of five (5) years of relevant experience in capital markets, fund management, securities research, or portfolio management.
- Mandatory NISM Certifications:
- Must have valid certification in NISM-Series-XXI-B: Portfolio Managers Certification Examination; and/or
- NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors Examination (as applicable).
Principal Officer Profile: Professional Degree (CA/CFA/MBA) + >= 5 Yrs Capital Market Exp + NISM-Series-XXI-B
Compliance Officer and Risk Architecture
- Compliance Officer: Every portfolio manager must designate a dedicated Compliance Officer who reports independently to the Board of Directors. The Compliance Officer ensures adherence to SEBI regulations, PMLA directives, SEBI Insider Trading (PIT) mandates, and handles investor grievance escalations.
- Fit and Proper Person Criteria: The applicant, its directors, principal officer, compliance officer, and significant shareholders must fulfill Schedule II of the SEBI (Intermediaries) Regulations, 2008 (integrity, financial solvency, absence of criminal convictions or debarments).
- Physical Infrastructure: Adequate office space, secure IT systems, disaster recovery mechanisms, and automated audit trails for trade execution and client reporting.
7.3 Portfolio Administration, Custody, Trade Allocation, and Segregation of Assets
Absolute Segregation of Client Assets
Unlike a mutual fund pool where all unitholders share in an undivided collective trust property, a Portfolio Manager operates on the foundation of individual client asset segregation:
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| INDIVIDUAL CLIENT ACCOUNT SEGREGATION |
+-----------------------------------+-----------------------------------+---------------------------+
| Client A (HNI 1) Demat & Bank | Client B (Corporate) Demat & Bank | Client C (Trust) Demat & Bank|
+-----------------------------------+-----------------------------------+---------------------------+
| - Unique DP Account | - Unique DP Account | - Unique DP Account |
| - Unique Bank Account | - Unique Bank Account | - Unique Bank Account |
| - Full Beneficial Ownership | - Full Beneficial Ownership | - Full Beneficial Ownership|
+-----------------------------------+-----------------------------------+---------------------------+
^ ^
| Managed under POA/DDPI by |
+-----------------+-----------------+
|
PORTFOLIO MANAGER ENTITY
(Never commingles proprietary assets)
- Independent Bank and Demat Accounts: Every PMS client maintains an individual depository (demat) account and bank account opened in their own legal name. Securities and funds are held in individual client accounts, guaranteeing that the investor retains direct beneficial ownership.
- No Commingling: The portfolio manager must never commingle client funds or securities with the firm's own proprietary funds or with the accounts of other clients.
- Appointment of Independent Custodian: Discretionary portfolio managers must appoint an independent SEBI-registered Custodian to settle securities transactions, hold physical certificates (if any), and track corporate benefits (dividends, bonus shares, rights issues).
Trade Allocation and Execution Protocol
When a discretionary portfolio manager decides to purchase or sell a security across multiple client portfolios simultaneously (a block or bunched order), strict regulatory rules govern the order routing and execution to prevent cherry-picking:
Step 1: Portfolio Manager aggregates block trade order across 25 client accounts
Step 2: Aggregated order routed to stock broker for market execution
Step 3: Market fills achieved across varying price tranches throughout the trading session
Step 4: Executed shares allocated to each client account at Volume-Weighted Average Price (VWAP)
Step 5: Custodian completes DvP electronic settlement to each client's unique demat account
- Volume-Weighted Average Price (VWAP) Allocation: All participating client accounts receive the identical execution price, computed as the volume-weighted average price across all fills for that aggregate order on that trading day.
- Pro-Rata Allocation on Partial Fills: If an aggregated order is only partially executed in the market, the available shares are distributed strictly on a pro-rata basis proportional to each client's initial order allocation. Portfolio managers are prohibited from allocating preferential fills to select high-value clients.
- Audit Trails: Every trade allocation sheet must be electronically logged, timestamped, and transmitted to the custodian prior to or immediately following execution.
Corporate Benefits and Voting Rights
- Direct Credit of Benefits: Cash dividends, interest coupons, bonus shares, and split shares flow directly into each client's registered bank and demat accounts.
- Voting on Shareholder Resolutions: Portfolio managers must establish a comprehensive Voting Policy. Under SEBI guidelines, discretionary portfolio managers are required to exercise voting rights prudently on behalf of clients, disclose quarterly voting records on their websites, and document rationales for voting in favor, against, or abstaining from corporate resolutions.