The Disclosure Document is a critical document that provides essential information about portfolio management services to investors. This article explains the contents of the Disclosure Document and the update requirements under SEBI regulations.
The Regulatory Mandate
Legal Basis
Regulation 22(3) of the SEBI (Portfolio Managers) Regulations, 2020 requires that the portfolio manager shall provide to the client, the Disclosure Document, in the format as may be specified by SEBI, along with a certificate in Form C, prior to entering into an agreement with the client.
Purpose
The purpose of the Disclosure Document is to provide essential information about the portfolio services in a manner to assist and enable the investors in making informed decision for engaging a portfolio manager.
Structure of the Disclosure Document
SEBI has simplified the Disclosure Document format, dividing it into two sections.
Static Section
The Static section includes parameters that do not change frequently:
- Disclaimer clause
- Definitions
- Description (history, present business, background)
- Penalties, pending litigation or proceedings
- Services offered
- Risk factors
- Nature of expenses
- Taxation
- Accounting policies
- Investors services
- Details of the diversification policy of the portfolio manager
Dynamic Section
The Dynamic section covers parameters that require regular updates:
- Client Representation
- Financial Performance
- Performance of Portfolio Manager
- Audit Observations (of the preceding 3 years)
- Details of investments in the securities of related parties of the portfolio manager
Contents of the Disclosure Document
Mandatory Contents
Regulation 22(4) specifies the following mandatory contents:
1. Fees and Charges: The quantum and manner of payment of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly.
2. Portfolio Risks: Portfolio risks including risk specific to each investment approach offered by the portfolio manager.
3. Related Party Transactions: Complete disclosures of transactions with related parties as per the accounting standards specified by the Institute of Chartered Accountants of India.
4. Conflicts of Interest: Details of conflicts of interest related to services offered by group companies or associates of the portfolio manager.
5. Investment in Related Parties: The details of investment of client's funds by the portfolio manager in the securities of its related parties or associates.
6. Diversification Policy: The details of diversification policy of the portfolio manager.
7. Performance: The performance of the portfolio manager, calculated using 'Time Weighted Rate of Return' for the immediately preceding three years.
8. Audited Financial Statements: The audited financial statements of the portfolio manager for the immediately preceding three years.
Certification Requirements
Chartered Accountant Certification
The contents of the Disclosure Document shall be certified by an independent chartered accountant.
Principal Officer Certification
Only the page(s) containing change(s) in any parameter would need to be certified by the Principal Officer of the PMS.
Form C Certificate
The portfolio manager shall file disclosure document along with the certificate in Form C as specified in Schedule I.
Update Requirements
Material Changes
Material change shall include change in control of the Portfolio Manager, Principal Officer, 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.
Update Timeline
The updated Disclosure Document Page(s) in which changes are carried out shall be simultaneously communicated to the clients, updated on the website of portfolio manager and filed with SEBI within 7 working days from the date of change.
Website Availability
The portfolio manager shall ensure that a copy of Disclosure Document is available on the website of the portfolio manager at all times and as soon as the registration is granted.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on Disclosure Document compliance for portfolio managers. Our securities law experts help clients draft compliant Disclosure Documents, ensure timely updates, and maintain regulatory compliance. Contact us for guidance on Disclosure Document and other regulatory matters.