Under the 1993 Regulations, every PM was required to have a net worth of ₹ 20,000,000 (approx. US $ 267,000). This has now been increased to ₹ 50,000,000 (approx. US $ 667,000). Existing PMs have been provided a period of three years (i.e., by January 16, 2023) to meet the revised net-worth requirement.

The minimum investment amount (by way of funds and/or securities) which can be accepted by the PM from its client has been increased from ₹ 2,500,000 (approx. US $ 33,300) under the 1993 Regulations to ₹ 5,000,000 (approx. US $ 66,700) under the 2020 Regulations. The revised minimum investment amount is applicable for new clients of the PM, as well as fresh investments by existing clients of the PM.

Under the 1993 Regulations, the principal officer (PO) could have been any employee who was designated as the principal officer by the PM. Under the 2020 Regulations, in addition to these requirements, the definition of PO also specifies that the PO would be responsible for (i) the decisions made by the PM for the management or administration of portfolio of securities or the funds of the client; and (ii) all other operations of the PM.

Further, the eligibility criteria of a PO has been revised such that a PO is now required to meet all of the following requirements:

(a) have a professional qualification in finance, law, accountancy or business management from any university or institution recognized by the Central Government or a State Government or a foreign university or a CFA charter from the CFA Institute.

(b) have experience of at least 5 years (as opposed to 10 years earlier) in related activities in the securities market including in a portfolio manager, stock broker, investment advisor, research analyst or as a fund manger (at least 2 years relevant experience is required to be in portfolio management or investment advisory services or in areas related to fund management, and

(c) have relevant NISM certification as specified by SEBI. However please note that SEBI has not specified NISM certifications for a PO yet.

Existing PMs have been provided a time period of 36 months (i.e. upto January 15, 2023) to comply with the above requirements.

The 2020 Regulations also specify that any employee of the PM who has decision making authority related to fund management is also required to meet the same minimum qualifications and experience requirements for a PO.

Additionally, records maintained by a PM in support of every investment transaction or recommendation which will indicate the data, facts and opinion leading to that investment decision are now required to be maintained under the hands of the PO of the PM.

PMs are now required to appoint a compliance officer at the time of applying to SEBI for grant of registration as a PM. It is also clarified that the role of compliance officer cannot be assigned to the PO or the additional employee of the PM.

Under the 1993 Regulations, the PM was required to have in its employment minimum two persons who, between them, had atleast 5 years of experience in specified areas.

Under the 2020 Regulations, in addition to the PO and the compliance officer, the PM is also required to have in its employment at least one other person who is required to meet the stated qualification and experience requirement. Further, the earlier requirement of such employee having five years of experience in stated areas has now been reduced to two years, which now also includes experience in investment advisory activities.

For existing PMs, the 2020 Regulations has provided a period of one year (i.e., till January 15, 2021) to meet such requirements.

SEBI has introduced a new concept of “investment approach” offered by the PM, details of which are required to be covered in any documentation issued by the PM. The 2020 Regulations provides that ‘an investment approach is a broad outlay of the type of securities and permissible instruments to be invested in by the PM for the customer, taking into account factors specific to clients and securities’.

Further, SEBI has now also specified details of aspects which are required to be covered for every investment approach offered by the PM. However implementation of this requirement has been extended to October 1, 2020.

Under the 2020 Regulations, provisions relating to ‘investment approach’ must now be included in the PM agreement with clients. Further, the PM agreement must provide for the specified period of the agreement (in years), terms of termination and provisions for renewal, in case of renewable agreements. Any renewal of portfolio on maturity of the initial period would be deemed as a fresh placement for the purposes of the 2020 Regulations.

Under the 1993 Regulations, the PM was required to provide a copy of the Disclosure Document to the client two days prior to execution of the PM agreement. Under the 2020 Regulations, the Disclosure Document can now be shared with the client at the time execution of the PM agreement.

Further, the following additional details are required to be disclosed by the PM in the Disclosure Document – details of investment approach, details of risks specific to each investment approach, details of conflicts of interest related to services offered by group companies or associates of the PM, range of fees charged under various heads by the PM, details relating to all transactions of purchase and sale of securities by PM and its employees who are directly involved in investment operations if found having conflict of interest with the transactions in any of the client’s portfolio, and if the PM has group companies, a disclosure of conflict of interest related to services offered by group companies of the PM (if any) and audit observations of the preceding last 3 years.

Under the 2020 Regulations, the details of the performance of a discretionary PM is now required to be calculated using the ‘time weighted rate of return’ and not ‘weighted average method taking each individual category of investments’ as under the 1993 Regulations. The 2020 Regulations also permit the PM to disclose its performance segregated on the basis of investment approach followed by the PM. Further, the PM is required to report its performance uniformly in the disclosures to SEBI, its marketing materials, reports to the clients and on its website. The PM Guidelines also provides further clarifications in relation to reporting of performance by PMs.

The PM must ensure that a copy of the Disclosure Document is available on the website of the PM at all times. The PM is required to file the Disclosure Document with SEBI: (i) before circulating it to any client post being registered as a PM; and (ii) within seven working days from the date of any material change in the Disclosure Document including change in the investment approach by the PM.

Under the 2020 Regulations, every PM must follow these additional investment related restrictions:

· segregate each client’s holding in securities in separate accounts,

· investment in units of mutual funds should be only through direct plan, and the client should not be charged any kind of distribution related fees for such investment,

· no investment of clients’ funds in the portfolio managed or administered by another portfolio manager,

· no investment of client’s fund based on the advice of any other entity,

· no execution of off market transfers in client’s account except: (i) for settlement of the clients’ own trades; (ii) for providing margin/ collateral for clients’ own positions; (iii) for dealing in unlisted securities in accordance with the regulations; (iv) with specific consent of the client for each transaction; (v) for any other reason specified by SEBI from time to time.

Further, a discretionary PM is now permitted to invest its client’s funds only in securities which are listed or traded on a recognized stock exchange, money market instruments, units of mutual funds and other securities as specified by SEBI from time to time. PMs offering non-discretionary or advisory services to clients are permitted to invest or provide advice for investment up to 25% of the assets under management of such clients in unlisted securities, in addition to the securities permitted for discretionary portfolio management.

SEBI has under the PM Guidelines (implementation of which has been extended to October 1, 2020) made certain partial modification to its Circular dated October 05, 2010 (2010 Circular) on Regulation of Fees and Charges, and mandated the following:

(i) no upfront fees shall be charged by the PM, either directly or indirectly, to the clients;

(ii) Brokerage at actuals shall be charged to clients as expense;

(iii) Operating expenses excluding brokerage, over and above the fees charged for portfolio management service, shall not exceed 0.50% per annum of the client’s average daily Assets under Management (AUM);

(iv) In case client portfolio is redeemed in part or full, the exit load charged shall be as under:

a) in the first year of investment, maximum of 3% of the amount redeemed;

b) in the second year of investment, maximum of 2% of the amount redeemed;

c) in the third year of investment, maximum of 1% of the amount redeemed; and

d) after a period of three years from the date of investment, no exit load;

(v) The Annexure to the PM Agreement referred in paragraph 4(g) of the 2010 Circular shall be suitably modified for a sample portfolio of ₹ 5,000,000 (approx. US $ 66,700) as against the present illustration for ₹ 1,000,000 (approx. US $ 13,300); and

(vi) Charges for all transactions in a financial year (broking, demat, custody etc.) through self or associates shall be capped at 20% by value per associate (including self) per service. Any charges to self/associate shall not be at rates more than that paid to the non- associates providing the same service.

SEBI has under the 2020 Regulations provided that the PM is required to ensure that any person or entity involved in the distribution of its services is carrying out the distribution activities in compliance with the 2020 Regulations and circulars issued thereunder from time to time.

Further, SEBI has under the PM Guidelines (implementation of which has been extended) clarified that PMs are required to:

(i) utilize services of only such distributors (whether known as Channel Partners, Agents, Referral Interfaces or by any other name) who have a valid AMFI Registration Number or have cleared NISM- Series-V-A exam;

(ii) pay fees or commission to distributors only on trial-basis. Further, any fees or commission paid shall be only from the fees received by PMs;

(iii) ensure that prospective clients are informed about the fees or commission to be earned by the distributors for on-boarding them to specific investment approaches;

(iv) ensure that distributors abide by the Code of Conduct as specified in Annexure C to the PM Guidelines;

(v) have mechanism to independently verify the compliance of its distributors with the Code of Conduct; and

(vi) ensure that, within 15 days from the end of every financial year, a self-certification is also received from distributors with regard to compliance with Code of conduct.

With respect to direct on-boarding of clients by PM, the PM Guidelines provide that:

(i) PMs are required to provide an option to clients to be on-boarded directly, without intermediation of persons engaged in distribution services;

(ii) PMs are required to prominently disclose in its Disclosure Documents, marketing material and on its website, about the option for direct on-boarding; and

(iii) at the time of on-boarding of clients directly, no charges except statutory charges shall be levied.

PMs are now required to furnish a report to clients regarding details of their portfolio every three months (as opposed to six months earlier). Such reports are also required to provide details relating to default in payment of coupons or any other default in payments in the underlying debt security and downgrading to default rating by the rating agencies (if any), and details of commission paid to any distributors for the particular client, as per a format prescribed by SEBI.

The PM Guidelines provide that PMs are now required to: (i) report to SEBI on compliance with the provisions of earlier SEBI Circular dated November 18, 2003 on an annual basis as against bi-annual basis; (ii) submit a certificate from a qualified chartered accountant certifying the net-worth as on March 31, every year based on audited accounts within six months from the end of financial year; (iii) submit a certificate of compliance with 2020 Regulations and circulars issued thereunder, duly signed by the PO, within 60 days of end of each financial year. Further, details of non-compliance along with the corrective actions, if any, duly approved by the board of the PM; and (iv) submit a monthly report regarding their portfolio management activity, on SEBI Intermediaries Portal within seven working days of the end of each month, as per the revised format prescribed by SEBI.

Under the 1993 Regulations, there was a specific requirement under the ‘Conditions of Registration’ section for a PM to obtain prior approval of SEBI if it proposes to change its status or constitution, and the PM was also required to obtain a fresh PM registration from SEBI post completion of such change.

While the 2020 Regulations do retain a revised definition of the term ‘change of status or constitution’, there is no specific requirement imposed on the PM to seek prior approval of SEBI before any change in its status or constitution. Further, the scope of the current definition of ‘change of status or constitution’ does not include any ‘change in the managing director or whole-time director’ of a PM.

As under the 1993 Regulations, even the 2020 Regulations defines ‘change of control’ of unlisted companies to mean change in controlling interest in a body corporate. The scope of ‘controlling interest’ has been expanded to include not only any direct or indirect interest of atleast 51% of voting rights in the PM, but also the right to appoint majority of directors or to control the management directly or indirectly. Again, please note that while the 2020 Regulations provides for a definition of ‘change in control’, such term has not been used anywhere else in the 2020 Regulations.

Under the 1993 Regulations, prior approval of SEBI was required when there was a change in the status or constitution of the PM. Under the 2020 Regulations, the PM is only required to inform SEBI if any information or particulars previously submitted to SEBI are false or misleading, or if there is any material change in the information already submitted to SEBI. The PM Guidelines clarify that material change shall include change in control of the PM, PO, fees charged, charges associated with the services offered, investment approaches offered (along with the impact of such change) and such other changes as specified by SEBI from time to time.

Further, the 2020 Regulations provides that:

· in addition to other disclosures, the PM is required to intimate a change in the identity of the PO, if any, to SEBI and the clients within seven working days of such change;

· the PM is also required to report its performance uniformly in disclosures to SEBI, marketing materials and reports to clients and on its website; and

· the scope of disclosures to SEBI has been broadened such that SEBI can require the PM to disclose any information including the one specifically specified under the 2020 Regulations.

Under the 1993 Regulations, a PM, who had total assets under management of value less than ₹ 5,000,000,000 (approx. US $ 66.7 million) or who performed only advisory services, was exempted from appointing a custodian in respect of securities managed or administered by it.

Under the 2020 Regulations, every PM is required to appoint a custodian in respect of securities managed or administered by it and only exempts PMs that provide advisory services from appointment of custodians.