SEBI inspections frequently identify common compliance deficiencies. This article provides an illustrative checklist of findings to help portfolio managers prepare for inspections.
Net Worth Compliance
Failure to Maintain Minimum Net Worth
Failure to maintain the minimum net worth of ₹5 crore is one of the most common findings. SEBI has emphasized that the ₹5 crore net-worth requirement is critical to ensure that only financially robust entities manage public funds.
Misleading Net Worth Reports
Submitting incorrect and misleading compliance reports falsely suggesting that net worth meets regulatory standards is frequently flagged.
Net Worth Certificate
Failure to submit net worth certification is a common compliance deficiency.
Reporting Compliance
Failure to Submit Periodic Reports
Failure to submit mandatory periodic reports, including net worth certification, corporate governance reports, and portfolio manager compliance reports.
Incorrect Reports
Submitting incorrect and misleading reports on compliance with Portfolio Managers Regulations.
Delayed Reporting
Delayed submission of regulatory reports is a common issue.
Investment Compliance
Third-Party Investment Decisions
Investing client funds based on recommendations from third-party algo providers is prohibited.
Mis-selling
Mis-selling services to clients is a serious compliance violation.
Investment in Related Parties
Exceeding the prescribed limits for investment in related parties is a common finding.
Client Segregation
Failure to Segregate Client Assets
Failure to properly segregate client funds and securities is a serious compliance issue.
Co-Mingling
Co-mingling of client funds with the portfolio manager's own funds is prohibited.
Operational Compliance
Inadequate Infrastructure
Lack of adequate infrastructure, including office space, equipment, and manpower.
Dealing Room Deficiencies
Failure to comply with dealing room requirements, including recorded telephone lines and restricted access.
Audit Trail
Failure to maintain proper audit trail of all activities related to management of funds and securities.
Client Onboarding Compliance
KYC Deficiencies
Incomplete or inadequate KYC documentation.
Risk Profiling
Failure to conduct proper risk profiling of clients.
Agreement Deficiencies
Inadequate client agreements that do not meet regulatory requirements.
Fee Compliance
Upfront Fees
Charging upfront fees in violation of the prohibition.
Fee Disclosure
Failure to properly disclose fees and charges.
Operating Expense Cap
Exceeding the operating expense cap of 0.50% per annum.
Performance Reporting
TWRR Calculation Errors
Incorrect calculation of TWRR.
Performance Disclosure
Failure to properly disclose performance in marketing materials.
Benchmarking
Incorrect benchmark selection or tagging.
Record-Keeping
Inadequate Records
Failure to maintain required records.
Record Retention
Failure to retain records for the minimum period of five years.
Illustrative Checklist
Pre-Inspection Checklist
- Net worth certificate up to date
- All periodic reports submitted
- Client agreements in place
- KYC documentation complete
- Risk profiling conducted
- Fee disclosures made
- Performance reports accurate
- Records properly maintained
During Inspection
- Cooperate with inspecting authority
- Produce all required records
- Provide access to premises
- Assist with examination
Post-Inspection
- Address any findings
- Rectify deficiencies
- Submit compliance report
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on SEBI inspection preparedness for portfolio managers. Our securities law experts help clients identify potential issues, prepare for inspections, and address findings. Contact us for guidance on inspection preparedness and other regulatory matters.