SEBI inspections are a critical part of the regulatory oversight framework for portfolio managers. This article provides a complete readiness guide for handling a SEBI inspection.
The Regulatory Framework
Right of Inspection
The Board may appoint one or more persons as inspecting authority to undertake the inspection of the books of account, records and documents of the portfolio manager for any of the purposes specified in the regulations.
Purposes of Inspection
SEBI may conduct inspections to:
- Ensure that books of account are being maintained in the manner required
- Ensure that provisions of the Act, rules and regulations are being complied with
- Investigate complaints received from investors, other portfolio managers or any other person
- Investigate suo motu in the interest of securities market or investors' interest
Notice Before Inspection
Before undertaking an inspection, SEBI shall give a reasonable notice to the portfolio manager. However, where SEBI is satisfied that in the interest of investors no such notice should be given, it may by an order in writing direct that the inspection be taken up without such notice.
Preparation for Inspection
Maintain Complete Records
Ensure all required records are maintained and easily accessible:
- Books of accounts
- Client records
- Transaction records
- Compliance reports
- Audit reports
Designate a Point of Contact
Designate a senior person to coordinate with the inspecting authority.
Conduct Internal Review
Conduct an internal review of compliance before the inspection.
Prepare Documentation
Ensure all documentation is organized and readily available.
During the Inspection
Cooperate Fully
The portfolio manager shall allow the inspecting authority to have reasonable access to the premises and extend reasonable facility for examining any books, records, documents and computer data.
Production of Records
It shall be the duty of every director, partner, officer and employee of the portfolio manager to produce to the inspecting authority such books, accounts and other documents in his custody or control.
Assistance
It shall be the duty of every director, partner, officer or employee of the portfolio manager to give to the inspecting authority all assistance in connection with the inspection which the portfolio manager may reasonably be expected to give.
Examination
The inspecting authority shall in the course of inspection, be entitled to examine or record statements of any principal officer, director, partner and employee of the portfolio manager.
Offsite Inspection Reporting
Data Submission
Portfolio managers are required to submit data in a specified format for all its clients on a quarterly basis within 15 calendar days from end of the quarter.
Applicability
Portfolio Managers shall submit data for all their clients from April 1, 2023 onwards.
Post-Inspection
Action on Inspection Report
SEBI may after consideration of inspection report take such action as it may deem fit and appropriate.
Rectification
Take steps to rectify any deficiencies pointed out in the inspection report.
Compliance
Ensure ongoing compliance with all regulatory requirements.
Common Inspection Findings
Net Worth Non-Compliance
Failure to maintain the minimum net worth of ₹5 crore is a common finding.
Misleading Reports
Submitting incorrect and misleading compliance reports is frequently flagged.
Failure to Submit Reports
Failure to submit mandatory periodic reports, including net worth certification, corporate governance reports, and compliance reports.
Investment Decisions
Investing client funds based on recommendations from third-party algo providers or mis-selling services.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on SEBI inspection preparedness for portfolio managers. Our securities law experts help clients prepare for inspections, respond to inquiries, and address any findings. Contact us for guidance on inspection readiness and other regulatory matters.