Regulatory, governance and ethical aspects of PMS

The last chapter carries the most marks per page. It covers who may become a portfolio manager, what the Regulations oblige them to do, how investors are protected, and the ethical rules that bind you as a distributor. Nearly every question here has a precise answer in the SEBI (Portfolio Managers) Regulations, 2020 or the guidelines issued under them.

Registration under the 2020 Regulations

Only a body corporate may apply to SEBI for registration as a portfolio manager. The applicant must have a net worth of at least ₹5 crore, maintained continuously, and must be fit and proper. It must appoint a principal officer who holds a professional qualification in finance, law, accountancy or business management (or an equivalent such as CFA or CA), has at least five years of experience in securities-market activities such as portfolio management, broking, investment advice or fund management, and holds the relevant NISM certification. It must also employ at least one person with a graduate degree and two years of relevant experience, and appoint a compliance officer. Adequate office space, systems and a custodian arrangement are required; every portfolio manager other than an advisory-only one must appoint a SEBI-registered custodian.

SEBI grants a certificate of registration on payment of the registration fee; the certificate continues subject to periodic fees as notified and to compliance. SEBI may inspect the manager, call for information, and suspend or cancel the registration for violations. The 2020 Regulations replaced the 1993 Regulations, raised the minimum investment to ₹50 lakh and the net worth to ₹5 crore, and introduced the investment approach framework.

Obligations and investment restrictions

The manager acts in a fiduciary capacity and must keep the client's interest ahead of its own. The main duties:

• Sign a written agreement containing the prescribed terms before taking money, and provide the disclosure document before that.
• Keep each client's securities in a separate account in the client's name; never hold listed securities of clients in the manager's own name; never pledge or lend client securities without written permission.
• Not guarantee or assure any return, directly or indirectly.
• Not borrow funds or securities on behalf of the client, not deploy client funds in bill discounting or lending, and not use derivatives to leverage the portfolio.
• For discretionary accounts, invest only in listed or to-be-listed securities, money market instruments, mutual fund units and other securities SEBI specifies, with unlisted securities capped at 25% of the client's assets and unrated or below-investment-grade debt capped at 10%.
• Invest in securities of the manager's own associates or related parties only within the limits SEBI notifies and with the client's prior consent.
• Allocate trades across clients fairly, value the portfolio at prescribed norms, and keep books and records for at least five years.
• Report to the client at least quarterly, get the PMS books audited every year, file monthly reports with SEBI, and keep the disclosure document current.

The code of conduct in the Regulations adds the behavioural rules: integrity and fairness, reasonable care and diligence, no churning of client portfolios to generate brokerage, no misleading advertisements, confidentiality of client information, disclosure of conflicts of interest, and compliance with the advertisement code SEBI has prescribed for portfolio managers.

Investor protection

Protection runs through several channels. The disclosure document and fee illustration put the costs and risks in writing before the client commits. The compliance officer must handle complaints promptly; unresolved grievances go to SEBI's SCORES platform, where the manager must respond within the prescribed time, and then to the Online Dispute Resolution portal for conciliation and arbitration. Every manager publishes an investor charter and monthly complaint data. Insider trading is prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015, and market manipulation under the PFUTP Regulations, 2003; both bind the manager's employees and anyone, including a distributor, who trades on unpublished price-sensitive information. Under the Prevention of Money Laundering Act, 2002, the manager must verify identity, keep records and report suspicious transactions to FIU-IND, and a distributor who notices cash-based or layered dealings must escalate them.

Ethics for the distributor

A PMS distributor sits between a wealthy client and a manager who pays the distributor's commission. The ethical rules exist for that conflict:

• Suitability first. Recommend an investment approach only after understanding the client's profile, and document why it fits.
• Disclose. Tell the client that you are paid a trail commission by the manager and how much; tell her she may onboard directly.
• Never guarantee. No assured returns, no capital protection claims, no selective performance charts; use only the manager's approved material with the standard disclaimers.
• No cash, no rebates, no side deals. Do not accept cash, do not share commission with the client as an inducement, do not collect fees meant for the manager.
• Stay in role. Do not give personalised investment advice beyond the approach you are distributing, do not execute trades, and do not pass on tips from the manager's dealing room.
• Keep qualifications current. A valid NISM-Series-XXI-A certificate, APMI registration and empanelment with each manager, with records of every client interaction.
• Protect confidentiality of client information and follow the APMI code of conduct for distributors.

Regulation here is not a hurdle to clear; it is the product's credibility. A distributor who can quote the rule, the limit and the reason behind it is the one a cautious HNI keeps.