Responsibilities of a portfolio manager
The dos and don'ts in Regulations 23 and 24, and the administration rules around them.
A portfolio manager acts in a fiduciary capacity: it handles the client's money for the client's benefit, never its own. Regulations 23 and 24 of the SEBI (Portfolio Managers) Regulations, 2020 turn that duty into a list of specific dos and don'ts, and Chapter 7 of XXI-A tests that list closely.
For a distributor, these rules are what you can promise a client about how their money will be handled, and what should worry you if a manager seems to bend them.
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What a portfolio manager must do
- checkManage each discretionary client's funds individually and independently, in line with that client's needs; follow the client's directions under non-discretionary service.
- checkInvest only in terms of the agreement with the client.
- checkKeep each client's securities in separate accounts, apart from its own funds and securities, and be responsible for their safekeeping.
- checkKeep client funds in a separate account at a scheduled commercial bank, with client-wise back-office records, a monthly statement to each client and daily reconciliation.
- checkBuy and sell separately for each client; if it aggregates orders, allocate pro rata at the day's weighted average price, with no open allocation positions.
- checkHandle complaints promptly, and resolve them within 21 calendar days of receipt.
- checkMake sure anyone distributing its services follows the regulations and SEBI's circulars.
- checkComply with SEBI's Investor Charter for PMS.
What a portfolio manager must not do
| Prohibited | In practice |
|---|---|
| Derive any direct or indirect benefit from client funds or securities | No using client cash as float or client shares for its own deals |
| Borrow funds or securities on the client's behalf | Even to cover a short-term settlement shortfall |
| Lend client securities to third parties | Except securities lending, with the client's written authorisation |
| Leverage the client's portfolio for derivatives | Derivative exposure must be backed by the client's own funds |
| Deploy funds in bill discounting, badla financing, or lending to any company or other body | PMS money is for investing, not lending |
| Invest in a portfolio run by another portfolio manager, or on another entity's advice | The manager cannot outsource the investment decision |
| Enter speculative transactions settled other than by delivery | Derivatives are the stated exception |
| Hold client securities in its own name | They stay in the client's demat account |
| Make off-market transfers from the client's account | Except for the client's own trades, margin, permitted unlisted deals, or with specific consent for each transaction |
When a client can withdraw before the contract matures
Regulation 24(2) lets the client withdraw funds or securities early, whatever the agreement says, in three cases:
- check_circleVoluntary or compulsory termination of the service by the manager or the client.
- check_circleSuspension or cancellation of the manager's SEBI registration.
- check_circleBankruptcy or liquidation of the manager.
Free account, this exam preselected.
Administration: custodian, records, audit, compliance
- Custodian
- Every portfolio manager must appoint one for the securities it manages. An advisory-only manager is exempt, since it holds nothing.
- Records
- Balance sheet, profit and loss account, auditor's report, and a record of the facts and opinion behind every investment decision, kept under the Principal Officer. All are preserved for at least five years.
- Client accounts and audit
- Client-wise accounts, audited yearly. An independent chartered accountant audits the portfolio accounts every year and the client receives a copy of the certificate. A client may also appoint their own chartered accountant to audit their account.
- Auditor's findings
- Deficiencies in the auditor's report must be rectified within two months of the report.
- Compliance officer
- Monitors compliance and handles investor grievances, and reports any non-compliance directly to SEBI. The role cannot be given to the principal officer (a Co-investment Portfolio Manager is the exception).
How XXI-A tests this
Scenario questions dominate: a manager borrows shares to cover a client's shortfall, invests through another manager on a 'better' idea, or keeps client shares in its own name 'for operational ease'. Each is prohibited. Recall questions ask for numbers: five years for records, two months to fix auditor's findings, 21 calendar days for grievances. A common trap offers the principal officer as compliance officer; for an ordinary portfolio manager that is not allowed.
FAQs
What are the responsibilities of a portfolio manager?expand_more
To act in a fiduciary capacity, manage each client's portfolio individually under the agreement, keep client funds and securities segregated, appoint a custodian, maintain and audit client-wise accounts, report to clients and resolve complaints within 21 calendar days.
Can a portfolio manager borrow money for a client?expand_more
No. Regulation 24 bars a portfolio manager from borrowing funds or securities on behalf of the client.
Can a PMS client withdraw before the agreed period ends?expand_more
Yes, if the service is terminated by either side, if the manager's registration is suspended or cancelled, or if the manager goes bankrupt or into liquidation.
How long must a portfolio manager keep records?expand_more
At least five years.