Report on Portfolio Management Service Business

by Louis Noronha

Introduction
Contents
Introduction ............................................................................................................................ 3
1. Broad introduction to thesis topic and method. .................................................. 3
2. Statement of the problem and justification of the study. ............................ 3
3. Need for the research. Who will be benefited? .................................................... 3
4. Aims and objectives of the study. ............................................................................... 4
5. Review of literature. ......................................................................................................... 4
Methodology .............................................................................................................................. 5
1. Selection of Variables...................................................................................................... 5
2. Data sources. .......................................................................................................................... 5
Organization of the Study and Description .................................................................... 6
Analysis and Interpretation about the Topics .............................................................. 7
1. Brief Overview ........................................................................................................................ 7
2. Brief of SEBI (Portfolio Managers) Regulations 2020 ....................................... 7
3. Identification of key compliance obligations....................................................... 9
4. Analysis of record-keeping requirements ............................................................... 13
5. Evaluation of risk management practices ............................................................... 13
6. Examination of code of conduct and investor protection measures ........... 14
7. Implications of non-compliance and regulatory updates ................................. 16
8. Regulatory Updates.............................................................................................................. 16
9. Recommendations for enhancing compliance ............................................................. 17
Conclusion .............................................................................................................................. 19
1. Summary of Entire Thesis ................................................................................................ 19
2. Conclusions ............................................................................................................................. 19
3. Implications ........................................................................................................................... 19
4. Suggestions for Future Research ................................................................................. 19
Bibliography .......................................................................................................................... 20
 Introduction

1. Broad introduction to thesis topic and method.

Portfolio management business is the professional service provided by portfolio

managers, financial advisors, or investment firms in order to strategically
manage and optimize investment portfolios on behalf of individual clients,
institutional investors, or organizations. The main aim of a PMS Business is
to achieve financial goals of their clients by aligning their risk tolerance,
time horizon and investment objectives.

This project report gives an overview of regulatory and compliance aspects of

PMS Business. Compliance with financial regulations and fiduciary
responsibilities is essential for PMS Business, as they are entrusted with
managing clients' assets and making investment decisions on their behalf.
Ethical conduct, transparency, and putting clients' interests first are
fundamental principles in this business to build and maintain trust with
clients.

2. Statement of the problem and justification of the study.

The complexity of financial market regulations poses significant challenges for

a Company to carry out PMS Business activities smoothly. The problem addressed
in this project report revolves around the need for effective portfolio
management practices to avoid risks inherent in the regulatory landscape. By
delving into SEBI (Portfolio Managers) Regulations 2020 and other securities
law applicable, along with all the rules, regulations and circulars issued
thereunder, this study seeks to shed light on how proper corporate governance
measures and compliance checks must be in place.

3. Need for the research. Who will be benefited?

The findings of this research hold value for professionals such as Compliance
Officers, Regulatory Affairs Officers, and various other professionals in the
PMS Business. By gaining insights into the compliance framework, one can
mitigate the risks associated with it.
4. Aims and objectives of the study.

The primary aim of this project report is to analyze and evaluate the compliance
requirements under SEBI (Portfolio Managers) Regulations 2020 read with all
rules, notifications and circulars issued by SEBI thereby giving a broad
regulatory framework for operating in the PMS Business-

1. Brief of SEBI (Portfolio Managers) Regulations 2020

2. Identification of key compliance obligations
3. Analysis of record-keeping requirements
4. Evaluation of risk management practices
5. Examination of code of conduct and investor protection measures
6. Implications of non-compliance and regulatory updates
7. Recommendations for enhancing compliance

5. Review of literature.

The review of literature explores a wide array of websites, books, and articles
related to portfolio management.
 Methodology

1. Selection of Variables.

The selection of variables in this study takes into account the compliance
requirements set forth by regulatory authorities. It also considers duties of
portfolio managers towards clients emphasizing compliance with the code of
conduct prescribed by regulators. Additionally, the chosen variables are
instrumental in evaluating compliance with capital adequacy norms, client
suitability assessment, and disclosure of potential conflicts of interest, all
of which are crucial aspects of the compliance framework for portfolio
management businesses.

2. Data sources.

To ensure comprehensive data collection, both primary and secondary data sources
were utilized. Primary data was collected through discussions with compliance
officers. Secondary data was gathered from academic publications, reports, and
the regulators website. The use of both primary and secondary sources enhances
the reliability and accuracy of the information obtained.
 Organization of the Study
and Description

The organization of this project report is structured to provide a comprehensive

analysis of the regulatory framework of the PMS Business. The report is divided
into several sections, each focusing on specific aspects of compliance and its
relevance.
 Analysis and Interpretation
about the Topics

1. Brief Overview

This project report provides an overview of the regulatory and compliance

aspects within PMS businesses. Addressing the challenges posed by regulations,
the report emphasizes the necessity of effective practices for meeting
compliance obligations. The study delves into the SEBI (Portfolio Managers)
Regulations 2020 and related rules, exploring topics like compliance
obligations, risk management strategies, code of conduct adherence, investor
protection measures, implications of non-compliance, and recent regulatory
updates. By combining primary and secondary data sources, the research offers
insights to compliance personnels. The report further speaks about regulatory
awareness, training, segregation of duties, compliance officer appointment, and
standardized policies for enhancing compliance. Organized systematically, the
report serves as a comprehensive reference for professionals, investors, and
stakeholders in the PMS Business.

2. Brief of SEBI (Portfolio Managers) Regulations 2020

SEBI (Portfolio Managers) Regulations 2020 lays down the regulatory framework
for operating as a portfolio manager in India and encompass various rules,
notifications, and circulars issued by the Securities and Exchange Board of
India (SEBI). This section aims to provide a detailed analysis of these
regulations and their implications for portfolio management businesses.

To start with, the licensing requirements and eligibility criteria for entities
seeking to operate as portfolio managers is briefly given as under-

• Application to SEBI-
An application for grant of registration to act as a Portfolio Manager shall
be made in Form A of Schedule I of the PMS Regulations. No person can act
as a Portfolio Manager unless it has obtained this registration from SEBI.
• Infrastructure and Systems-
The applicant must have proper infrastructure in place including adequate
systems and technology, to effectively manage clients' portfolios. This
ensures that the entity can handle portfolio management activities
efficiently and deliver timely services to clients.
• Experience and Educational Qualifications of Key Personnel-
The applicant shall appoint principal officer / compliance office & an
additional person with the required qualifications as prescribed in the PMS
Regulations.
• Net Worth Requirement-
The Net Worth shall not be less than INR 5 Crores, separately and
independently of the capital adequacy requirements for each activity under
relevant SEBI Regulations. This net worth requirement ensures that the entity
has sufficient financial capacity to conduct portfolio management
activities.
• Fit and Proper Assessment-
The applicant should full the criteria of fit and proper person as laid down
in Schedule II of the Securities and Exchange Board of India (Intermediaries)
Regulations, 2008.

Further, the Code of Conduct for Portfolio Managers outlines the professional
standards that portfolio managers are required to uphold while conducting their
business. Key highlights are given as under-

• Integrity and Fairness

• Prompt Deployment of Funds
• High Standards of Service
• No Trading Against Clients
• No Unfair Competition
• Truthful Representation
• Disclosure of Interests
• Confidentiality
• Client's Interest
• Providing Adequate Information
• Prohibition on Market Manipulation
• Disclosure in Investment Advice
• Compliance with Regulations
• No Influence on Investment Decisions

In addition to the above points, Portfolio Managers have the following more
responsibilities-

• They must maintain transparency with clients by providing clear disclosures

of fees, charges, and investment risks before entering into contracts. This
includes making disclosures to clients about the composition of their
investment portfolios, securities held and respective proportions
• They are required to implement strong risk management practices. The due
diligence process to be undertaken while onboarding clients, ensuring that
their investment objectives, risk tolerance, and financial position is
 aligned with the recommended investment strategies. Mitigation techniques
should be put in place to safeguard client investments
• Regular reporting to clients detailing performance, investment activities,
and any material changes are required to be submitted to SEBI as well as the
clients
• Strict compliance with SEBI Insider Trading Regulations is necessary to
prevent any misuse of information and market manipulation
• An effective investor grievance redressal mechanism must be in place to
handle client complaints promptly

In conclusion, the brief review of SEBI Regulations in the PMS business serves
as a reference for portfolio management businesses, investors, and industry
stakeholders.

3. Identification of key compliance obligations

The compliance requirements under the SEBI Regulations and Master Circular are
examined. This includes a thorough analysis of the reporting timelines mandated
by SEBI.

MONTHLY REPORTING

Monthly report Clause 5.11 Within 7 working Upload the report

regarding days of the end on SI Portal
Portfolio of each month
Management
activity

Investor Clause 7.21 By 07th of the Disclose on the

complaints data succeeding month website

SUPERVISION OF DISTRIBUTORS

Self- Clause 2.4.1.61 Within 15 days -

certification from from the end of
distributors with every Financial
regard to Year i.e., on or
compliance with before April 15th
Code of Conduct every year
 CORPORATE GOVERNANCE REPORT

Review of the Clause 5.2.21 Reporting to SEBI Submit the report

following at on compliance to SEBI via email
periodical with the clause
meetings of the while submitting
Board: the corporate
governance report
• Quarterly annually
reports of
Compliance The report should
• Due diligence be submitted to
has been SEBI within 30
exercised days from the end
• Redressal of of the Financial
investor Year i.e., on or
grievance before April 30th
• Deficiency/ every year
warning letters
• Internal Audit
report

COMPLIANCE REPORTS

Certificate from Clause 5.2.1.11 Within 6 months Submit the report

qualified CA from the end of to SEBI via email
certifying Net the Financial
Worth as on March Year i.e., on or
31 every year before September
based on audited 30th every year
accounts

Certificate of Clause 5.2.1.21 Within 60 days Submit the report

Compliance and from the end of to SEBI via email
non-compliance, if each Financial
any and corrective Year i.e., on or
actions thereon, before May 30th
from the Principal every year
Officer
 FIRM LEVEL PERFORMANCE REPORTING

Confirmation of Clause 5.31 Firm level Submit the report

compliance with performance data to SEBI via email
Clause 4.5.31 Regulation 22(10) shall be audited
2
annually

Certified report
(by Board/
authorized
person) to be
reported to SEBI
within 60 days of
end of each
Financial Year
i.e., on or
before May 30th
every year

ACCOUNTS AND AUDIT REPORTING

Audit of the Regulation 30(2)2 Accountant Submit the

portfolio certificate shall certificate to
accounts, be submitted SEBI via email
accounting methods within 6 months
and procedures of the close of
the accounting
period i.e., on
or before
Regulation 30(3)2 September 30th
every year

Submitted to
Client-wise clients separately
Portfolio as soon as possible
Accounts shall be after the end of
audited, and the the Financial Year
audited reports as the same will be
shall be provided required by the
to each client clients to file
individually their Income Tax
Returns.
Copies of Balance Regulation 272 Within 6 months Submit all
Sheet, P&L, and of the close of documents to SEBI
such other the accounting via SI Portal
documents for the period i.e., on
preceding 5 or before
accounting years September 30th
every year

2
Deficiencies in Regulation 32 Within 2 months Portfolio Manager
audit report from the date of to take steps to
the auditor’s rectify the
report deficiencies made
out in auditor’s
report and submit
it to SEBI

QUARTERLY PERFORMANCE REPORTING

Periodic report to Regulation 312 Report shall be Provide to client

the client, not submitted to the and made available
exceeding a period clients after the on website with
of 3 months and as end of every restricted access
and when required quarter to each client
by the client

DISCLOSURE DOCUMENT REPORTING

Whenever there is Regulation 22 (7) Within 7 working File a copy of the

any material 2 days from the disclosure document
change date of change with SEBI

Change in identity Regulation 22 (9) Within 7 working Disclose such

of the Principal 2 days of effecting change to SEBI and
Officer the change the clients

INVESTOR CHARTER

Displaying the Clause 4.4.21 To be displayed Website disclosure

investor charter permanently
on the website
 INVESTOR GRIEVANCE REGISTER

Updating the Regulation 23 In case of any -

register (10)2 complaints, the
register shall be
updated and
maintained

12

4. Analysis of record-keeping requirements

Regulation 27 pertains to maintaining books & records. The key provisions

related to this requirement are as follows-

• The Portfolio Manager shall maintain copy of the balance sheet, profit &
loss account, auditors report and net worth certificate issued by chartered
accountant in practice as at the end of each accounting period. At the end
of the accounting period, copies of the same must be submitted to SEBI as
and when required.
• Further, records supporting every investment transaction or recommendation,
providing data, facts and opinions leading to that investment decision/
rationale shall be maintained.
• The retention period of the above points is minimum five years.
• This responsibility falls under the hands of the Principal Officer.

The aim of the given regulation is to ensure that the portfolio manager maintains
accurate and updated financial records and provides transparent information to
clients & regulatory authorities.

5. Evaluation of risk management practices

In the context of portfolio management businesses, regulatory compliance and

ethical considerations are crucial. The report explores the regulatory framework
that governs portfolio management, including licensing requirements and
compliance with the regulations.

Additionally, it addresses the ethical responsibilities portfolio managers have

towards their clients. Managing conflict of interest is important to ensure
integrity in carrying out business between client and the portfolio manager.

Effective risk management ensures potential losses are reduced. The key factors
to consider are as follows-

1 Master Circular dated March 20, 2023

2 SEBI (Portfolio Managers) Regulations 2020
• Various types of risks should be identified such as market risk, credit
risk, regulatory risk. Identification of risks is the first step to ensure
proper risk mitigation measures would be in place.
• Once the risks are identified, proper assessment and measurement of the
impact such risk possess should be undertaken.
• Further, evaluation is carried out to determine the tolerance towards the
risk and accordingly align strategies. A well-diversified portfolio can help
spread risk.
• One should also ensure that the portfolio manager complies with all
regulatory requirements.
• Basis the above points, regularly reviewing risk reports can provide for
proper management of all risks.

6. Examination of code of conduct and investor protection measures

The code of conduct prescribed for portfolio managers is critically examined.

This includes an evaluation of ethical standards, measures for avoiding
conflicts of interest, and client-centric practices.

The key provisions of the Code of Conduct are as follows:

1. Integrity and Fairness: Portfolio managers must maintain high standards

of integrity and fairness in their interactions with clients and other
portfolio managers.

2. Prompt Deployment of Funds: Funds received from clients for investment

purposes should be deployed promptly, and money due to clients should be
paid without delay.

3. High Standards of Service: Portfolio managers must exercise due diligence,

exercise independent professional judgment, and ensure proper care in
delivering services to clients. They must avoid conflicts of interest or
provide fair treatment when conflicts arise, disclosing potential sources
of conflict to clients.

4. No Trading Against Clients: Portfolio managers are prohibited from

executing trades against the interests of clients in their proprietary
accounts.

5. No Unfair Competition: Portfolio managers should refrain from making

statements or engaging in practices that harm the interests of other
portfolio managers or put them at a disadvantage during competition.

6. Truthful Representation: Portfolio managers must not make exaggerated

claims about their qualifications, capabilities, or achievements to
clients.
 7. Disclosure of Interests: At the contract's inception, portfolio managers
must obtain in writing their clients' interests in corporate bodies that
enable access to unpublished price-sensitive information.

8. Confidentiality: Portfolio managers must not disclose any confidential

information about clients that they acquire during the course of business.

9. Client's Interest: Portfolio managers should act in the client's interest

and take necessary steps for securities transfer, dividends, and other
client rights.

10. Providing Adequate Information: Portfolio managers must provide true and
adequate information to investors, inform them of risks, and offer the
best possible advice based on clients' needs.

11. Prohibition on Market Manipulation: Portfolio managers must not

participate in false market creation, price rigging, or divulge price-
sensitive information to intermediaries, ensuring investor protection.

12. Disclosure in Investment Advice: Portfolio managers must disclose their

long or short positions in securities while rendering investment advice
in publicly accessible media.

13. Compliance with Regulations: Portfolio managers are required to abide by

relevant laws, regulations, and guidelines issued by SEBI, including the
Prohibition of Insider Trading Regulations.

14. No Influence on Investment Decisions: Portfolio managers should not use

their status as registered intermediaries to unduly influence clients'
investment decisions.

The Portfolio Manager will endeavour to address all complaints regarding service
deficiencies or causes for grievance, in a reasonable manner and within defined
timelines.

The key provisions of the investor protection measures are as follows:

1. The Portfolio Manager must appoint a dedicated grievance officer

responsible for handling and overseeing all investor grievances. In terms
of Regulation 34, the compliance officer is responsible for the same. He
should be easily accessible to investors and act as a point of contact
for grievance resolution.

2. As part of the investor grievance redressal process, dedicated email ID,

mobile number should be given on the website of the PMS provider as well
as a proper policy should be in place for handling complaints.
Furthermore, SEBI has in place a web-based complaints redressal system
known as SCORES wherein customers can lodge a complaint if not satisfied
with the resolution provided by the intermediaries.
7. Implications of non-compliance and regulatory updates

SEBI has put in place significant implications for non-compliance of the PMS
Regulations in order to ensure investor protection and maintaining market
integrity.

The key implications of non-compliance are as follows:

1. Penalties & Fines- SEBI has power to impose substantial penalties or

fines on the intermediaries that fail to comply with the PMS Regulations
which in turn could affect its financial capability.

2. Legal Actions & Enforcement- Non-compliance can lead to legal actions

initiated by the regulatory authorities or affected clients. This may
result in costly legal proceedings and reputational damage.

3. License Suspension- Serious or repeated non-compliance may lead to the

suspension or revocation of the portfolio management firm's license to
operate, effectively shutting down their business.

4. Investor Losses- Non-compliance can expose investors to undue risks

resulting in financial losses.

8. Regulatory Updates

The section also keeps a keen eye on any recent regulatory updates, amendments,
or circulars issued by SEBI relevant to the portfolio management business. This
ensures that the review is up to date with the latest developments in the
regulatory landscape.

SEBI has come up with two new circulars since the issuance of Master Circular
for PMS Business, gist of which is explained as under-

1. Circular dated March 29, 2023, on Cyber Security and Cyber Resilience
Framework for Portfolio Managers.
SEBI issued a circular to address cyber-attacks and threats in the
portfolio management business. The circular emphasizes the importance of
maintaining confidentiality, integrity, and availability of computer
systems, networks, and databases. It establishes a cyber security
framework to prevent such attacks and respond effectively.

Portfolio managers are required to formulate a comprehensive policy

approved by their Board. The policy should cover the above points and be
aligned with the principles prescribed by the National Critical
Information Infrastructure Protection Centre (NCIIPC) and best practices
from standards such as ISO 27001, ISO 27002, and COBIT 5.
 A Chief Information Security Officer (CISO) should be appointed
responsible for assessing and reducing cyber security risks, implementing
controls, and ensuring policy compliance.

Audit by independent qualified auditors is required annually to check

compliance with the cyber security measures. Outsourced activities should
be monitored to ensure compliance with the policy and requirements
specified in the circular. The responsibility, accountability, and
ownership of outsourced activities remain with the portfolio manager.

2. Circular dated August 02, 2023, on Audit of Firm-Level Performance Data

of Portfolio Managers.

SEBI has issued a circular reminding all Portfolio Managers and the
Association of Portfolio Managers in India (APMI) of the requirement to
audit firm-level performance data on an annual basis. This audit must be
conducted for all clients' portfolios managed, including both
discretionary and non-discretionary portfolio management services.

To ensure uniformity, APMI, in consultation with SEBI, will specify

standardized Terms of Reference (ToR) for the audit. The specified
standard ToR will be mandatory for all Portfolio Managers from October
01, 2023. Portfolio Managers must submit the confirmation of compliance
with the annual audit requirement to SEBI within sixty days from the end
of each financial year. This report should be certified by
Directors/Partners of the Portfolio Manager or by individuals authorized
by the Board of Directors/Partners.

9. Recommendations for enhancing compliance

Enhancing compliance in PMS Business is crucial and a Company can strengthen

the PMS business compliance by adopting following recommendations –

1. Regulatory Awareness- Continuously stay updated with the latest

regulatory changes, circulars, and guidelines issued by SEBI. Develop a
dedicated team responsible for tracking regulatory updates and ensuring
timely compliance.
Example: Having a dedicated individual to track regulatory affairs and
analysing SEBI circulars and regulations.
2. Regular Training and Discussions- Conduct regular training programs for
employees, portfolio managers, and other staff members about compliance
requirements, ethical conduct, and best practices.
Example: Conducting training sessions on topics like AML to discuss case
studies and strategies to deal with key issues.
3. Segregation of Duties- Prevent having a single person from having full
control over critical processes.
 Example: Divide the duties and checking responsibilities. The work of one
individual should be reviewed by other another team member as well.
4. Compliance Officer- Appoint a dedicated compliance officer responsible
for overseeing all compliance-related activities, reporting to
management, and ensuring adherence to regulations.
Example: Appointment of a qualified person as per SEBI Regulations.
 Conclusion

1. Summary of Entire Thesis

From a compliance point of view, the thesis on portfolio management business

adhered to ethical aspects and regulatory standards throughout the research
project. Data collection and analysis followed best practices to ensure the
accuracy and reliability.

2. Conclusions

In conclusion, compliance with regulatory requirements and ethical

considerations is paramount in the portfolio management business. Portfolio
managers must prioritize transparency, disclosure, and compliance with
regulations to maintain the trust of their clients.

3. Implications

From a compliance perspective, the implications of the research highlight the

need for portfolio management businesses to establish robust compliance
frameworks. Compliance departments should actively monitor portfolio managers'
actions to detect any potential conflicts of interest or violations of industry
regulations.

4. Suggestions for Future Research

To enhance compliance practices in portfolio management businesses, future

research could focus on investigating the effectiveness of compliance training
programs and identifying best practices for compliance risk management.
Furthermore, exploring the impact of regulatory changes on portfolio management
practices could shed light on the industry's evolving compliance landscape.
 Bibliography

Securities and Exchange Board of India (sebi.gov.in)

• Regulations
• Master Circular
• Recent Updates

https://www.investopedia.com/terms/i/internalcontrols.asp

https://www.schgroup.com/resource/blog-post/5-steps-to-enhance-your-
organizations-compliance-efforts