A portfolio manager, defined as a body corporate, provides advice, direction, or takes on the responsibility for managing and administering a client’s investment portfolio. This professional service is rendered after entering into a contractual agreement with the client. Portfolio Managers are often referred to as fund managers. Compliance with SEBI regulations is fundamental and a body corporate must obtain registration as a portfolio manager to conduct these operations. The governing regulations are outlined in the SEBI (Portfolio Managers) Regulations, 1993. In this blog we shall see how to register yourself as a portfolio manager with SEBI.
Understanding Portfolios
A portfolio represents a collection of investment instruments, including bonds, equities, private equity, stocks, mutual funds, and more. These tools are selected based on the client’s risk tolerance, return objectives, income, budget, and time horizon. Portfolios are broadly categorised into two types:
1. Market Portfolio: This type of portfolio consists of a diversified mix of investments that mirrors the overall market or a specific market segment. It aims to capture market returns while managing risk.
2. Zero Investment Portfolio: A zero investment portfolio is a theoretical construct that helps in assessing the risk and return trade-offs of various assets within a portfolio. It doesn’t require any initial capital outlay.
Who is a Portfolio Manager with SEBI?
A portfolio manager with SEBI is an individual responsible for crafting an appropriate investment strategy and employing portfolio management techniques to manage investors’ portfolios. The role of a portfolio manager encompasses providing guidance and consultancy to investors, aiding them in choosing the optimal investment plan tailored to their risk-return preferences, income, budget, and financial aspirations.
Steps for Effective Portfolio Management by a Portfolio Manager with SEBI
The key steps to be factored in by a portfolio manager with SEBI are as follows:
1. Understand Client’s Objectives:
Portfolio manager with SEBI begins by engaging with clients to comprehensively understand their investment objectives, risk tolerance, time horizon, and desired returns. This step forms the foundation for crafting a suitable investment strategy.
2. Choose Asset Classes:
Once client goals are clear, the portfolio manager with SEBI selects appropriate asset classes for investment. These may include bonds, stocks, private equity, and other investment vehicles.
3. Strategic Asset Allocation:
Portfolio manager with SEBI conducts strategic asset allocation, determining the ideal allocation for each asset class within the portfolio. For example, they may allocate 40% to equities and 60% to bonds to strike a balance between risk and return.
4. Tactical Asset Allocation:
A portfolio manager with SEBI may use tactical asset allocation to adjust investments based on changing market opportunities. This approach differs from insured asset allocation, where asset weights are adjusted based on client wealth. Both approaches are not used simultaneously.
5. Risk Management:
Effective risk management is crucial. A portfolio manager with SEBI must control various risks, including security selection risk (by holding market index directly), style risk (related to investment style), and tactical asset allocation risk (by choosing systematic risk factors as benchmarks).
6. Performance Measurement:
Portfolio performance is assessed using the Capital Asset Pricing Model (CAPM) method. The CAPM model describes the relationship between expected return and security risk. Performance is typically evaluated by comparing portfolio returns to market returns and other relevant benchmarks.
By following these steps, a portfolio manager with SEBI can construct and manage portfolios that align with their clients’ financial goals, risk tolerance, and investment objectives.
Roles and Responsibilities of a Portfolio Manager with SEBI
A portfolio manager with SEBI plays a crucial role in managing investors’ funds and ensuring the best investment outcomes. Their roles and responsibilities encompass:
1. Fund Management: Portfolio managers are responsible for managing the investment funds of their clients. They make informed decisions about how to allocate capital to achieve optimal returns within defined risk parameters.
2. Investment Advisory: They educate clients about various investment tools and policies, offering guidance and recommendations tailored to individual needs and objectives.
3. Customised Solutions: Portfolio managers design customised investment solutions that align with clients’ financial constraints, income levels, and time horizons, ensuring personalised investment strategies.
4. Stay Informed: Keeping updated with the latest amendments and regulatory changes, especially those issued by regulatory bodies like SEBI, is essential. Compliance with the latest notifications and circulars is imperative.
5. Honesty and Integrity: Building trust and maintaining long-term relationships with clients is paramount. Portfolio managers must act with honesty and integrity, prioritising the clients’ best interests over personal gain.
6. Objective Advice: Portfolio managers should provide objective investment advice, focusing on the best policies and strategies available in the market, rather than prioritising their own commission or financial gain.
7. Effective Decision-Making: The ability to make sound investment decisions is crucial. Portfolio managers must choose the most appropriate investment policies and instruments while considering clients’ risk tolerance and objectives.
8. Regular Communication: Consistent communication with clients is vital. Portfolio managers should be accessible, addressing client queries promptly and making themselves available when required.
Portfolio managers act as financial stewards, guiding clients through the intricacies of investment to help them achieve their financial goals while managing risk effectively.
Pre-Registration Conditions for Portfolio Manager Registration with SEBI
In order to apply for portfolio manager registration with SEBI, applicants must fulfill specific mandatory requirements. These prerequisites are carefully examined by the Board upon receipt of an application.
Corporate Status Requirement
The applicant must operate as a Body Corporate; individual applicants are not eligible for portfolio merchant registration. This essential, if not fulfilled by the applicant shall end up in rejection of his application with the SEBI Board so one must ensure this before making the application.
Infrastructure and Human Resource Requirements
To effectively provide portfolio management services, the applicant must possess essential infrastructure and human resources, including:
i. Office space
ii. Equipment
iii. Human resource
Qualifications for Principal Employer
The principal employer, overseeing portfolio management services, must meet the following qualifications:
a) Post-graduation or Professional Qualification: In finance, law, accounting, or business management from a recognised university or institution.
b) Experience: Minimum ten years of experience in security market-related activities, such as portfolio manager, stockbroker, fund manager, etc.
c) CFA Charter: Qualified from the CFA institute.
Employee Experience Requirement and Minimum capital
The applicant must employ at least two individuals with a minimum of five years of experience in stockbroking, investment management, fund management, etc.
Applicants are also required to fulfill a capital requirement of INR 5 Crore.
Disclosure Obligations and Litigation Involvement Prohibition
Applicants must provide detailed information on previously rejected applications made to SEBI and disclose any disciplinary actions initiated against the applicant or related individuals.
No applicant, director, principal officer, or employee should be involved in any ongoing litigation.
Procedure for Registration of Portfolio Manager with SEBI
The registration of portfolio managers involves several steps and compliance with regulatory requirements. The procedure is as follows:
Step 1: Filling out the Application Form
An individual eligible for registration as a portfolio manager must duly fill out the application Form A as outlined in Schedule I. Alongside the application, a non-refundable application fee, as specified in Schedule II, should be submitted. Applications submitted prior to the enactment of these regulations will be taken into consideration if they align with the stipulated requirements of Form A.
Step 2: Submission of the Application
The next step involves submitting the fully completed application, along with the necessary documentation and fees, to SEBI. Ensuring that the application is comprehensive and strictly adheres to the guidelines and instructions provided in the regulations and Form A is of utmost importance.
Step 3: Review by SEBI
Upon receiving the application, SEBI will review it thoroughly. SEBI reserves the right to request additional information or clarifications related to the portfolio manager’s activities. In some cases, SEBI may ask the applicant or its principal officer to appear for a personal representation. If an application is incomplete or does not comply with the given instructions, it is liable to rejection. However, the Securities Exchange Board of India extends an opportunity to the applicant to rectify any deficiencies within a specified timeframe, mostly within a span of three weeks.
Step 4: Approval for Grant of Certificate
During the review process, SEBI will assess all relevant aspects necessary for portfolio management activities. To grant the certificate of registration, SEBI must be satisfied with the application. If SEBI is content with the application, it will inform the applicant of the approval and request payment of the registration fee as specified in Schedule II.
Step 5: Grant of Certificate of Registration
Upon receipt of the requisite fees, SEBI will proceed to grant the certificate of registration to the portfolio manager. This certificate signifies official recognition and authorisation to operate as a portfolio manager in compliance with regulatory standards.
It’s important for applicants to adhere to these steps diligently and meet SEBI’s requirements for successful registration as a portfolio manager.
Final Thoughts
The process of registering as a portfolio manager with SEBI in compliance with SEBI regulations is a carefully structured endeavor. Each step, from completing the application form to addressing any inquiries from SEBI, demands careful attention and precision. This stringent process is designed to ensure that only qualified individuals and entities are entrusted with the critical responsibility of managing investment portfolios.
SEBI’s thorough scrutiny plays a pivotal role in upholding the integrity and professionalism of the financial industry. It serves to safeguard the interests of investors and maintain regulatory standards. Upon successful completion of this rigorous process, a certificate is issued, granting the portfolio manager the authorization to partake in portfolio management activities.
