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To become a portfolio manager, an applicant must submit an online application through the SEBI Intermediaries Portal and pay a non-refundable application fee of INR1,00,000/- by direct deposit into SEBI’s bank account via NEFT/RTGS/IMPS or any other mechanism permitted by RBI. Alternatively, the application fee can be paid by demand draft payable to ‘Securities and Exchange Board of India’ and payable in Mumbai or the location of the appropriate regional office.

Anyone interested in becoming a Portfolio Manager under the PMS Regulations must submit an application in Form A using the online system at https://siportal.sebi.gov.in.

According to the SEBI (Portfolio Managers) Regulations, 2020, the portfolio manager must charge a fee for portfolio management services based on the agreement with the customer. The cost may be a set sum, a performance-based fee, or a combination of the two. The portfolio manager may not charge the customers any advance fees, either directly or indirectly.

The agreement between the portfolio manager and the client must specify, among other things, the amount and manner of fees due by the client for each activity for which the portfolio manager provides services directly or indirectly.

Portfolio Managers must invest funds of their clients in securities listed or traded on a recognized stock exchange, money market instruments, units of Mutual Funds through the direct plan, and other securities as specified by the Board from time to time under the Discretionary Portfolio Management Service (DPMS). Portfolio Managers can invest up to 25% of a client’s AUM in unlisted stocks under the Non-Discretionary Portfolio Management Service (NDPMS), in addition to the securities allowed for discretionary portfolio management.

Units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), debt securities, shares, warrants, and other securities not listed on any recognized stock exchanges in India are considered “unlisted securities” for investment by Portfolio Managers.

Charges for all transactions through self or associates in a financial year (broking, Demat, custody, etc.) should be capped at 20% by value per associate (including self) per service. Such restrictions will apply to DEMAT services, custodian services, and other related services. Furthermore, any fees charged to self/associates must not be higher than those charged to non-associated for the identical service. In the case of Broking services, for example, the total amount paid to the associate Stockbroker during the year cannot exceed 20% of the total brokerage paid for trades on behalf of its clients.

If Portfolio Manager has multiple associate Stockbrokers, each transaction through each associate Stockbroker is limited to 20% of the total brokerage paid for trades on behalf of the Portfolio Manager’s clients during the year.

A discretionary portfolio manager’s performance is measured using the time-weighted rate of return (TWRR) technique over the previous three years or duration of operation, whichever is shorter. SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/26, dated February 13, 2020, includes information on portfolio manager performance reporting as well as a client reporting format that includes information on the client account’s performance, portfolio manager’s performance, and the appropriate benchmark.

The portfolio manager should provide the client with a report on a regular basis, according to the agreement, but not more than once every three months and such report shall include the following information: –
The portfolio’s composition and value, a description of the securities and commodities, the number of securities, the value of each security held in the portfolio, the units of goods, the value of goods, the cash balance, and the portfolio’s aggregate value as of the date of the report.
Transactions made throughout the reporting period, including the date of the transaction and the specifics of the purchases and sales.
Beneficial interest was obtained in the form of interest, dividends, bonus shares, rights shares, and so on throughout that time period.
Expenses incurred in maintaining the client’s portfolio.
Specifics of risk anticipated by the portfolio manager, as well as the risk associated with assets suggested for investment or disinvestment by the portfolio manager.
Default in coupon payments or any other payment default in the underlying debt instrument, and, if applicable, downgrade to default rating by rating agencies.
Information of the commission paid to the distributor(s) for this client

Prior to entering into an agreement with the client, the portfolio manager gives the client the Disclosure Document. The Disclosure Document includes the amount and method of payment of fees due by the client for each activity, portfolio risks, complete disclosures regarding transactions with related parties, the portfolio manager’s performance, and the portfolio manager’s audited financial statements for the previous three years.

Investors may discover the name, address, and phone number of the portfolio manager’s investor relations officer (who handles investor questions and complaints) in the Disclosure Document. The Disclosure Document also mentions the grievance resolution and dispute procedure. Investors can approach SEBI for a redress of their grievances if the Portfolio Manager does not address their concerns. Investors can file complaints via SCORES (SEBI Complaints Redress System – https://scores.gov.in/scores/Welcome.html) or by writing to the address shown below.

Office of Investor Assistance and Education,

Securities and Exchange Board of India,

SEBI Bhavan II

Plot No. C7, ‘G’ Block,

Bandra-Kurla Complex, Bandra (E),

Mumbai – 400 051

Begin with the current market value at the start of the term.
Make your way to the end of the period by moving ahead in time.
Calculate the portfolio’s market value immediately before contributing to or withdrawing from it.
Calculate a sub-period return for the time interval between the valuation dates, i.e. the contribution and/or withdrawal dates, using the formula:
(Ending Market Value – Beginning Market Value – Contribution + Withdrawal) ÷ (Beginning Market Value + Contribution – Withdrawal)
Steps 3 and 4 should be repeated for each contribution and/or withdrawal.
Calculate a subperiod return for the last period until the end of the period market value when there are no more contributions and/or withdrawals.
Take the product of (1+sub-period returns) to compound the sub-period returns. Geometric linking or chain connecting of sub-period returns is what this is termed.
Subtract one from the product value calculated in step seven.
To calculate the TWRR for the time period under consideration, multiply the result by a percentage as shown in step 8 above.

The examination consists of 80 multiple choice questions and 3 case-based questions. The assessment structure is as follows:

Multiple Choice Question (80*1 Mark Each) – 80 Marks

3 Case-Based Questions

2 Cases (5 Questions * 1 Marks Each) – 10 Marks
1 Case (5 Questions * 2 Marks Each) – 10 Marks

The exam should be completed in 2 hours. The passing score for the examination is 60%. There shall be a negative marking of 25% of the marks assigned to a question.

The nominal rate of return is the amount of money generated by an investment before factoring in expenses such as taxes, investment fees, and inflation. If an investment generated a 10% return, the nominal rate would equal 10%. After factoring in inflation during the investment period, the actual (“real”) return would likely be lower.

Nominal Rate of Return = Present Market Value – Original Market Value / Original Investment Value.

Liquidity or marketability refers to the ease with which an investment can be bought or sold in the market. Liquidity risk refers to an absence of liquidity in an investment. Thus, liquidity risk implies that the investor may not be able to sell his investment when desired, or it has to be sold below its intrinsic value, or there are high costs to carrying out transactions. All of this affects the realizable value of the investment.

Interest rate risk refers to the risk that bond Costs will fall in response to rising interest rates and rise in response to declining interest rates. Bond investments are subject to volatility due to interest rate fluctuations. This risk also extends to debt funds, which primarily hold debt assets. The relationship between rates and bond Costs can be summed up as follows:

If interest rates fall or are expected to fall, bond Costs increase.
If interest rates rise or are expected to rise, bond costs decline.

Category I AIF: AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure, or other sectors or areas that the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds, and such other Alternative Investment Funds as may be specified.
Category II AIF: AIFs that do not fall in Category I and III and do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012.
Category II AIF: AIFs employ diverse or complex trading strategies and may employ leverage through investment in listed or unlisted derivatives.

A Follow On Public Offer (FPO) is a type of public offering where the issuer of the securities already has outstanding shares registered. An FPO allows these shareholders to sell some or all of their holdings and any new investors who may purchase shares through the offer. An FPO can have several benefits for a company, including providing liquidity to shareholders and raising additional capital. It can also help to increase the market visibility and trading volume of a company’s shares.

The private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered or limited to listed shares only because no public offering is involved. The limit is less than 50 per financial year and less than 200 in total placement.

Preference Shares are very typical and special shares / equity instruments with some of the common characteristics of debt and equity. They behave like Shares in the form of ownership, and their prices can climb over time as they are traded, but are similar to debt because they pay investors fixed returns in the form of dividends. Preference Shares are used by professional and private investors who prefer a medium risk and return.

An FCCB is issued as a fixed income instrument / bond by an Indian enterprise that is expressed in foreign currency. The principal and interest are also payable in denominated foreign currency. The maximum tenure of the bond is 5 years. Structurally, FCCB is a quasi-debt investment, which can be converted into equity shares at the choice of investors either immediately after issue, upon maturity, or during a set period, at a predetermined strike rate or a conversion price.

Depository Receipts is a negotiable and transferable instrument in the form of financial security t that is often traded on a local stock exchange. Still, it represents security, which is often an equity instrument that is issued by a foreign company listed on a foreign stock exchange. Thus it is an instrument that allows the investors to hold shares in the equity of other countries on a domestic exchange.

Anchor Investor is a new concept introduced by regulators recently. Anchor Investors belong to the Qualified Institutional Buyers (QIB) category. Hence, they are always in a better position to measure the fundamentals as well as the future prospects of a company. QIB includes foreign institutional investors (FII), mutual funds, banks, provident funds, and other market intermediaries. The minimum application size for each anchor investor is Rs 10 crore.

A Mortgage-backed Security (MBS) is fixed income security that is collateralized by a mortgage or a collection of mortgages or loans. An MBS is asset-backed security traded on the secondary market, enabling investors to profit from the mortgage business without the need to buy or sell mortgages or loans directly. A mortgage contained in an MBS must have originated from an authorized financial institution.

Diversification of Correlated non-asset reduces risks in an investment, and it is also called Cross-sectional Risk Diversification. This is achieved by reducing risk by holding different equities in many different kinds of business at a certain point in time. This is also maximized when you hold uncorrelated equities for a long period of time. That is why it is called TIME IN MARKET is important and NOT the TIMINGS

Geographic Migration: Discovery of shell gas helped the US to score over OPEC
Cross Industry Migration: Conventional banks were replaced by Digital and Internet banking, and now Neo-banking
Value Chain Migration: Higher benefits than the lower value chain. A typical example of a telecom operator – JIO, which benefitted from Vodafone and others
Cross Companies Migration: Economic value creation and superior technology or features scores over others – like Samsung and Apple score over other small mobile phone manufacturer.
Cross Product Migration: Usage from serving to cloud computing is a typical example.

Step 1: Gross Sales – GST = Net Sales
Step 2: Net Sales – Cost = EBITDA
Step 3: EBIT (DA) – Interest (Debt + Equity) = Cash flow from operations (EBTDA)
Step 4: Cash flow from Operations – Capex or Re-investment Expense = Free Cash flow to FIRM, also known as Profit Before tax (PBT)
Step 5: Free Cash flow to FIRM – (Tax & Depreciation & Amortization) = Free Cash flow to EQUITY, also known as Profit Before tax (PBT)

Step 1: Gross Sales – GST = Net Sales
Step 2: Net Sales – Cost = EBITDA
Step 3: EBIT (DA) – Interest (Debt + Equity) = Cash flow from operations (EBTDA)
Step 4: Cash flow from Operations – Capex or Re-investment Expense = Free Cash flow to FIRM, also known as Profit Before tax (PBT)
Step 5: Free Cash flow to FIRM – (Tax & Depreciation & Amortization) = Free Cash flow to EQUITY, also known as Profit After tax (PAT)

Any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors is referred to as an Alternative Investment Fund or AIF. AIF does not include funds regulated by the SEBI (Mutual Funds) Laws, 1996, the SEBI (Collective Investment Schemes) Regulations, 1999, or any other Board regulations governing fund management. Furthermore, the AIF Regulations grant certain exemptions from registration to family trusts established for the benefit of relatives as defined by the Companies Act, 1956, employee welfare trusts or gratuity trusts established for the benefit of employees, ‘holding companies’ as defined by Section 4 of the Companies Act, 1956, and so on.

Debt funds are Alternative Investment Funds (AIFs) that invest primarily in debt or debt securities of listed or unlisted investee firms in order to achieve the Fund’s stated goals. These funds are classified as Category II funds. It should be noted that because the Alternative Investment Fund is a privately pooled investment vehicle, the funds supplied by the investors will not be used to make loans.

“Angel Fund” is a sub-category of Venture Capital Fund under Category I alternative Investment Fund that obtains funds from angel investors and invests in compliance with AIF Regulations Chapter III-A. An angel fund will only be able to raise capital by selling units to angel investors. “Angel investor” refers to someone who wants to invest in an angel fund and meets one of the following criteria:

An individual investor with at least two crore rupees in net tangible assets, excluding the value of his primary dwelling, and who:

Has early-stage investment experience, or

Has experience as a serial entrepreneur, or

Is a senior management professional with at least ten years of experience.

A company with at least ten crore rupees in net value; or

A VCF registered under the SEBI (Venture Capital Funds) Laws, 1996, or an AIF registered under similar regulations.

Angel funds must take an investment of not less than ’25 lakh from an angel investor for a period of up to three years.

An AIF scheme (other than an angel fund) may not have more than 1000 investors. (Please note that if the AIF is incorporated as a company, the requirements of the Companies Act, 1956 will apply.) No plan may have more than 49 angel investors in the case of an angel fund. An AIF, on the other hand, cannot invite the general public to subscribe to its units and can only receive capital from skilled investors through private placement.

Yes. The launch of schemes by an AIF is contingent on the submission of a placement memorandum with SEBI.

It should also be mentioned that an AIF must pay Rs. 1 lakh in scheme fees to SEBI prior to the commencement of the scheme while filing the placement memorandum. This charge must be paid at least 30 days prior to the start of the plan. Payment of scheme fees is not required in the case of the AIF’s first scheme (other than an angel fund) and angel funds.

An AIF can attract money from any competent investor, including Indians, foreigners, and non-resident Indians, who are willing to take on the risk of investing in predominantly unlisted or illiquid securities. However, an AIF (other than an angel fund) will not take an investment of less than one crore rupee from an investor. The minimum investment amount for investors who are employees or directors of the AIF or employees, or directors of the Manager is twenty-five lakh rupees.

To ensure that the Manager/interests sponsors are aligned with those of the AIF’s investors, the AIF Regulations require that the sponsor/manager have an ongoing interest in the AIF, which cannot be achieved by the waiver of management fees. Such interest shall be not less than two and a half percent of the corpus or five crore rupees, whichever is less, for Category I and II AIFs, and not less than five percent of the corpus or ten crore rupees, whichever is less, for Category III AIFs. Angel funds must pay interest of at least two and a half percent of the corpus or fifty lakh rupees, whichever is lower.

All AIFs must comply with the general obligations, responsibilities, and transparency standards set out in Chapter IV of the AIF Regulations. Chapter IV outlines the AIF’s unique investor disclosure duties, including conflict of interest, information on fund investments, fees, different risks, valuation, and so on.

AIFs may also give additional information to investors in the placement memorandum, in addition to what is required by the AIF Regulations. What must information about fees and charges be mentioned in the placement memorandum? Every AIF must include as an annexure to its placement memorandum a thorough tabular example of how the fees and charges will be applied to the investor, including the distribution waterfall.

These modifications may include, but are not limited to:

The sponsor/manager has changed (not including an internal restructuring within the group)

Changes in the sponsor/control manager’s

Changes in the fee structure or hurdle rate that might result in increased costs for unitholders

However, in the event of major developments that have a significant impact on the investor’s choice to continue to participate in the AIF, the procedure outlined in Circular No. CIR/IMD/DF/14/2014, dated June 19, 2014, must be followed. The trustee of the AIF (in the case of a trust) or the sponsor (in the case of any other AIF) will be in charge of managing the process, ensuring compliance, and keeping SEBI up to date on developments.

Investors can file complaints against AIFs using SEBI’s web-based centralized grievance resolution system, SEBI Complaint Redress System (SCORES), which can be found at http://scores.gov.in. Furthermore, the AIF, either directly or through the Manager or Sponsor, is required by the AIF Regulations to establish a procedure for resolving disputes between the investors, the AIF, the Manager, or the Sponsor through arbitration or any other mechanism mutually agreed upon by the investors and the AIF.

An AIF may accept the following individuals as joint partners for a minimum investment of one crore rupees:

An investor and his/her spouse
An investor and his/her parent
An investor and his/her daughter/son
In the case of the aforementioned investors, no more than two people may participate as joint investors in an AIF.
In the case of any additional investors acting as joint investors, the minimum investment amount of one crore rupees would apply to each investor. The term “joint investors” refers to a situation in which each investor contributes to the AIF.

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FAQs

Frequently Asked Questions

What is the role of a Portfolio Manager?

What is the distinction between discretionary and non-discretionary portfolio management services?

What is the procedure for filing a portfolio manager registration application to SEBI?

What is a portfolio manager's minimum net worth requirement?

What are the maximum fees a portfolio manager can charge his customers for the services he provides?

What are the many types of securities that a Portfolio Manager may invest a client's money in?

Is it possible for clients who use discretionary PMS to invest their money in unlisted bonds that are sold over the counter but settled and disclosed to stock exchanges?

An existing Non-Discretionary PMS client who has previously invested in certain unlisted stocks wishes to subscribe to a rights issue of those unlisted securities, which might result in a violation of the 25% restriction. Is it legal to do so?

What is the minimal amount of funds or securities that the portfolio manager can accept from a customer when starting a PMS account?

Prior to January 21, 2020, clients who were onboarded by the Portfolio Manager were obliged to invest a minimum of INR 25 lacs. What is the smallest amount that such clients can invest (top-up) on or after January 21, 2020?

Is it possible for existing Portfolio Managers' customers to withdraw part of their portfolio?

Is the customer obligated to top up his account if the portfolio value falls below the SEBI (Portfolio Managers) Regulations, 2020 minimum investment amount as a result of portfolio valuation?

How do the restrictions on transactions carried out by Portfolio Managers' associates apply?

Is there a limit to the number of non-associates who can perform the transactions mentioned in the preceding question?

On what basis is the portfolio manager's performance measured?

How will the performance fee be computed in light of the high watermark concept?

In light of the high watermark concept, how will the performance fee be calculated?

What type of reports may the portfolio manager provide to the client?

What is the portfolio manager's mechanism for disclosing information to their clients?

Is there any SEBI approval for the services provided by portfolio managers?

Is the portfolio manager's disclosure document approved by SEBI?

What are the rules that govern a Portfolio Manager's services?

Is it possible for a Portfolio Manager to bind an investor?

Is it possible for a Portfolio Manager to provide forecasted or guaranteed returns?

Where can a potential investor find information on portfolio managers?

What is the best place for an investor to make a complaint?

What are the Steps to Calculating TWRR for Individual Portfolios?

What is the aim of the Certification Examination for PMS?

What is the assessment structure of the PMS Certification Examination?

What is the subject orientation of the PMS Certification Examination?

What is the question orientation of the PMS Certification Examination?

How many chapters are there?

Please describe the chapter-wise exam allocation for PMS Certification.

What are the types of Case studies in the examination?

What are the SEBI regulations regarding the PMS Certification Exam?

What are the chapters allocated in the certification exam for PMS?

What are savings?

What is the investment?

What is speculation?

How does inflation work?

What are the things in the market that initiate inflation?

What is discounting method in return analysis?

What is the compounding method in return analysis?

What Is the Nominal Rate of Return?

What is the definition of risk?

What are the types of risk in investment?

What are the risks you might expect while investing?

What is the definition of Inflation Risk?

What is the definition of Default Risk?

What is the definition of Liquidity Risk?

What is the definition of Re-investment Risk?

What is the definition of Business Risk?

What is the definition of Exchange Rate Risk?

What is the definition of Interest Rate Risk?

What is the definition of Systematic risk?

What is the definition of Un-Systematic risk?

What are the safety ratings in Bonds?

What does the CRISIL AAA Safety rating mean?

What does the CRISIL AA Safety rating mean?

What does the CRISIL A Safety rating mean?

What does the CRISIL BBB Safety rating mean?

What does the CRISIL BBB Safety rating mean?

What does the CRISIL BB Safety rating mean?

What does the CRISIL B Safety rating mean?

What does the CRISIL C Safety rating mean?

What does the CRISIL D Safety rating mean?

What are the names of Market Instruments in Investment?

What are the market intermediaries?

Who are the market participants in Investments?

Who are the market participants in Investments?

What are the benefits of Investing in Mutual Funds?