8.1 Eligible Clients, Statutory Minimum Investment (₹50 Lakh), and Investor Profiling

Eligible Client Entities for PMS

Under SEBI (Portfolio Managers) Regulations, 2020, portfolio management services cater to sophisticated investors capable of committing significant capital and absorbing capital market volatilities. The following domestic and international entities are legally eligible to invest through a registered PMS:

+---------------------------------------------------------------------------------------------------+
|                                  ELIGIBLE PMS CLIENT ENTITIES                                     |
+-----------------------------------+---------------------------------------------------------------+
| Resident Individuals & HUFs       | - High-Net-Worth Individuals (HNIs), Ultra HNIs, Hindu         |
|                                   |   Undivided Families (represented by Karta)                   |
+-----------------------------------+---------------------------------------------------------------+
| Corporate Entities & Partnerships | - Public and Private Limited Companies, Limited Liability     |
|                                   |   Partnerships (LLPs), Partnership Firms                      |
+-----------------------------------+---------------------------------------------------------------+
| Institutional Trusts & Bodies     | - Family Trusts, Registered Public/Private Trusts, Endowments |
|                                   |   Societies registered under Societies Registration Act       |
+-----------------------------------+---------------------------------------------------------------+
| Non-Resident Entities             | - Non-Resident Indians (NRIs), Persons of Indian Origin (PIO),|
|                                   |   Overseas Corporate Bodies (subject to RBI FEMA / PIS norms) |
+-----------------------------------+---------------------------------------------------------------+
| Institutional / Accredited        | - Qualified Institutional Buyers (QIBs), Accredited Investors |
| Investors                         |   (eligible for regulatory relaxations on minimum tickets)    |
+-----------------------------------+---------------------------------------------------------------+

Statutory Minimum Ticket Size: The ₹50 Lakh Mandate

To ensure that retail investors are insulated from complex customized equity strategies, SEBI raised the minimum investment requirement:

1. ₹50 Lakh Mandatory Threshold: Under Regulation 23(2), a portfolio manager shall not accept from the client, funds or securities worth less than ₹50 Lakh (Fifty Lakh Rupees).
2. Grandfathering of Legacy Accounts: Clients onboarded prior to the amendment under the older ₹25 Lakh regime were grandfathered; however, any fresh capital top-up or new strategy activation must comply with the ₹50 Lakh floor.
3. Partial Withdrawals and Market Drawdowns: If the portfolio value drops below ₹50 Lakh solely due to downward market price fluctuations, the client is NOT required to inject top-up funds. However, any voluntary withdrawal by the client must not reduce the remaining portfolio value below ₹50 Lakh.
4. Accredited Investor Exemption: SEBI framework for 'Accredited Investors' allows individuals with annual income $\ge$ ₹2 Crore or net worth $\ge$ ₹7.5 Crore (with $\ge$ 50% in financial assets) to negotiate customized terms, including potential flexibility below standard minimum ticket sizes.

Investor Profiling and Risk Assessment Funnel

Before executing the portfolio management agreement, the portfolio manager must conduct a rigorous investor profiling exercise:

+---------------------------------------------------------------------------------------------------+
|                                   INVESTOR RISK PROFILING FUNNEL                                  |
+-----------------------------------+---------------------------------------------------------------+
| Risk Capacity (Objective Ability) | - Age, net worth, liquid asset buffer, stable income streams  |
|                                   | - Investment horizon (e.g., 3-5 years vs. 10+ years)          |
|                                   | - Outstanding financial liabilities and liquidity constraints |
+-----------------------------------+---------------------------------------------------------------+
| Risk Tolerance (Psychological)    | - Emotional response to short-term mark-to-market drawdowns   |
|                                   | - Prior investment experience in volatile equity cycles       |
|                                   | - Willingness to sacrifice capital certainty for higher alpha |
+-----------------------------------+---------------------------------------------------------------+
| Suitability Harmonization         | - Mapping client to Conservative, Moderate, or Aggressive     |
|                                   |   PMS strategies. Final allocation constrained by LOWER of    |
|                                   |   Risk Capacity and Risk Tolerance.                           |
+-----------------------------------+---------------------------------------------------------------+

8.2 Disclosure Document (Form C), Fee Structures, and High-Water Mark (HWM) Principle

The Disclosure Document (Form C)

Regulation 22 of the SEBI (Portfolio Managers) Regulations, 2020 mandates that every prospective client receive a copy of the official Disclosure Document at least two days prior to entering into an agreement:

+---------------------------------------------------------------------------------------------------+
|                               FORM C DISCLOSURE DOCUMENT MANDATORY CONTENTS                       |
+-----------------------------------+---------------------------------------------------------------+
| Corporate Details & Promoters     | - History, background of promoters, top management, directors |
+-----------------------------------+---------------------------------------------------------------+
| Key Personnel Track Record        | - Qualifications, experience of Principal Officer & managers  |
+-----------------------------------+---------------------------------------------------------------+
| Disciplinary History              | - All penalties, litigations, or regulatory proceedings by    |
|                                   |   SEBI, RBI, or judicial courts against entity or promoters   |
+-----------------------------------+---------------------------------------------------------------+
| Investment Approaches Offered     | - Detailed description of each investment strategy, benchmark,|
|                                   |   asset allocation limits, risks, and portfolio turnover      |
+-----------------------------------+---------------------------------------------------------------+
| Audited Historical Performance    | - Performance of each strategy across preceding 3 financial   |
|                                   |   years calculated using Time-Weighted Rate of Return (TWRR)  |
+-----------------------------------+---------------------------------------------------------------+
| Conflict of Interest Disclosures  | - Transactions with related parties, group company brokerages |
+-----------------------------------+---------------------------------------------------------------+
| Complete Fee Schedule             | - Comprehensive illustration of all fees, charges, and loads  |
+-----------------------------------+---------------------------------------------------------------+

The Disclosure Document must be certified by an independent Chartered Accountant (confirming accuracy of disclosures) and submitted to SEBI annually.

PMS Fee Structures

Portfolio managers may charge clients under three primary fee modalities:

1. Fixed Management Fee: A fixed percentage (e.g., 1.5% to 2.5% per annum) calculated on the daily or monthly average Net Asset Value (NAV) of the portfolio, accrued monthly and billed quarterly.
2. Variable Performance Fee: A profit-sharing fee (e.g., 15% or 20% of profits generated) charged only upon exceeding a pre-agreed hurdle rate (e.g., 8% or 10% annual return) subject to the High-Water Mark.
3. Hybrid Model: Combination of a lower fixed management fee (e.g., 1.0% p.a.) plus a performance fee (e.g., 15% above an 8% hurdle rate).

+---------------------------------------------------------------------------------------------------+
| Operating Expenses & Frictions:                                                                    |
| - Custodial & Depository charges (DvP settlement, demat safekeeping)                               |
| - Brokerage and transaction costs (Capped by SEBI at standard institutional rates)                |
| - Audit fees and statutory stamp duty / STT                                                       |
+---------------------------------------------------------------------------------------------------+

The High-Water Mark (HWM) Principle

The High-Water Mark (HWM) is a regulatory and fiduciary mechanism that guarantees a portfolio manager charges performance fees ONLY on fresh net capital appreciation, preventing the manager from collecting performance fees on the recovery of past portfolio losses:

Year 0: Initial Capital Inflow = ₹1,00,00,000 (HWM set at ₹100.00)
Year 1: Portfolio rises to ₹1,20,00,000 (+20%). Hurdle rate 8% exceeded. 
        Performance fee charged on profit. New HWM = ₹120.00
Year 2: Market correction: Portfolio declines to ₹95,00,000 (-20.8%). 
        Zero performance fee charged. HWM remains ₹120.00.
Year 3: Portfolio rebounds to ₹115,00,000 (+21.05% in Year 3). 
        CRITICAL: Even though Year 3 gained 21%, portfolio value (₹115.00) is BELOW HWM (₹120.00).
        RESULT: ZERO performance fee can be charged!
Year 4: Portfolio surges to ₹135,00,000. 
        Performance fee charged ONLY on excess over HWM (₹135 - ₹120 = ₹15). New HWM = ₹135.00.

The High-Water Mark must be adjusted appropriately for any capital inflows (top-ups) or capital withdrawals made by the client during the accounting period.

8.3 Direct Onboarding, Power of Attorney/DDPI, Grievance Redressal (SCORES), and Regulatory Reporting

Direct Onboarding Mandate

To eliminate intermediary bias and excessive distribution commissions, SEBI mandated that all portfolio managers provide an explicit Direct Onboarding Option for clients:

• Zero Distribution Commission: Clients onboarding directly without an intermediary or distributor cannot be charged any distributor fee or upfront commission.
• Prominent Website Interface: The portfolio manager's digital platform and application forms must feature a clear, unbundled "Direct Plan" option.
• Lower Fee Structure: The fixed management fee for direct clients must be demonstrably lower, reflecting the absence of distributor trail commissions.

Client Onboarding Paths:
Path A (Distributor Route) : Client ---> PMS Distributor (Receives trail fees) ---> PMS Manager
Path B (Direct Route)      : Client ---> Direct Digital / Physical Application  ---> PMS Manager (Zero Distribution Fees)

Execution Mandate: Power of Attorney (POA) and DDPI

In a Discretionary PMS, the client grants limited operational authority to the portfolio manager to manage their demat and bank accounts:

1. Limited Purpose Power of Attorney (POA): Strictly limited to transferring securities for settlement of market trades executed by the manager, receiving dividends, and handling corporate actions.
2. Demat Debit and Pledge Instruction (DDPI): SEBI replaced broad POAs with standardized DDPIs. The DDPI explicitly limits broker/manager debit authorizations strictly to meeting exchange pay-in obligations arising from executed trades, eliminating unauthorized pledging or diversion risks.

Investor Grievance Redressal Mechanism: SCORES and ODR Portal

To guarantee rapid and impartial resolution of investor disputes, SEBI enforces a tiered grievance redressal framework:

+---------------------------------------------------------------------------------------------------+
|                                 INVESTOR GRIEVANCE REDRESSAL ESCALATION                           |
+---------------------------------------------------------------------------------------------------+
| Level 1: Internal PMS Escalation                                                                  |
| - Client registers grievance directly with PMS Compliance Officer / Investor Grievance Cell       |
| - Statutory resolution turnaround: Must be resolved within 30 calendar days                       |
+-------------------------------------------------+-------------------------------------------------+
                                                  | If unresolved or dissatisfied
                                                  v
+---------------------------------------------------------------------------------------------------+
| Level 2: SEBI Complaints Redress System (SCORES)                                                  |
| - Centralized digital complaint repository managed by SEBI (scores.sebi.gov.in)                   |
| - Automated tracking; failure of PMS to resolve triggers regulatory enforcement / inspection      |
+-------------------------------------------------+-------------------------------------------------+
                                                  | If still unresolved
                                                  v
+---------------------------------------------------------------------------------------------------+
| Level 3: Online Dispute Resolution (ODR) Portal                                                   |
| - Independent conciliation and online arbitration mechanism established under SEBI guidelines     |
| - Neutral arbitrator issues legally binding arbitral awards enforceable under the Arbitration Act |
+---------------------------------------------------------------------------------------------------+

Regulatory Reporting Mandates to SEBI and Clients

• Monthly Client Reporting: Discretionary portfolio managers must furnish monthly statements to clients detailing portfolio valuation, asset allocation, cash balances, all transactions executed during the month, corporate actions received, and gross fees debited.
• Reporting to SEBI: Monthly cumulative reporting on AUM (Discretionary, Non-Discretionary, Advisory), client count, performance across strategies, and compliance metrics uploaded to the SEBI portal within 7 working days from the close of each month.