The Portfolio Management Agreement (PMA) is the cornerstone of the client-portfolio manager relationship. This article provides a comprehensive overview of what SEBI mandates in every client contract.
The Regulatory Mandate
Legal Basis
Regulation 22(1) of the SEBI (Portfolio Managers) Regulations, 2020 requires that the portfolio manager shall, before taking up an assignment of management of funds and portfolio on behalf of a client, enter into an agreement in writing with such client that clearly defines the inter se relationship and sets out their mutual rights, liabilities and obligations relating to management of portfolio.
Contents Specified in Schedule IV
The contents of the agreement between the portfolio manager and the client are laid out in Schedule IV of the PM Regulations.
Mandatory Contents of the Agreement
1. Appointment and Scope
The agreement must specify:
- Appointment of portfolio manager
- Scope of services to be provided
- Functions, obligations, duties, and responsibilities
2. Investment Objectives and Guidelines
The agreement must include:
- Types of securities in which investment would be made specifying restrictions, if any
- Particulars regarding amount, period of management, repayment or withdrawal
- Taxation aspects such as Tax Deducted at Source
- Condition that the portfolio manager shall not lend the securities of the client unless authorized in writing
3. Risk Factors
The agreement must include a detailed statement of risks associated with each type of investment including the standard risks associated with each type of investment.
4. Period of Agreement
The agreement shall provide:
- The period of the agreement in years
- Terms of termination
- Provision for renewal in case of a renewable agreement
5. Conditions for Termination
The agreement must specify conditions under which the agreement may be altered, terminated, and implications thereof:
- Voluntary/mandatory termination by the portfolio manager
- Voluntary/mandatory termination by the client
- Suspension by SEBI or other regulatory authority
6. Maintenance of Accounts
The agreement must provide for maintenance of accounts separately in the name of the client as are necessary to account for the assets and any additions, income, receipts, and disbursements.
7. Change in Quantum of Funds
The agreement must specify conditions under which the client may withdraw cash or securities from the portfolio account or bring in additional cash to be managed.
8. Access to Information
The agreement must provide for:
- Client access to books of accounts relating to his transactions
- Auditing by a chartered accountant appointed by the client
- Furnishing of reports to the client at least once in three months
9. Terms of Fees
The agreement must specify:
- Quantum and manner of payment of fees and charges for each activity
- Brokerage costs
- Custody charges
- Cost related to furnishing regular communication, account statement
- Miscellaneous expenses
10. Billing
The agreement must specify:
- Periodicity of billing
- Whether payment to be made in advance
- Manner of payment of fees
- Type of documents evidencing receipt of payment of fees
11. Liability
Liability of Portfolio Manager: The agreement must cover liability in connection with:
- Recommendations made
- Errors of judgment
- Negligence or willful misfeasance
- Discharge of duties or acts of other intermediaries, brokers, custodians
Liability of Client: The agreement must restrict the liability of the client to the extent of his investment.
12. Death or Disability
The agreement must provide for continuation/termination of the agreement in event of client's death/disability, succession, nomination, representation.
13. Assignment
The agreement must specify conditions for assignment of the agreement by client.
14. Governing Law
The agreement must state the law/jurisdiction of country/state which governs the agreement.
15. Settlement of Grievances/Disputes
The agreement must provide for:
- Protection of act done in good faith
- Risks and losses
- Provisions for redressal of grievances
- Dispute resolution mechanism
- Reference for arbitration
Fee Disclosure Annexure
The client agreement shall contain a separate annexure which shall list all fees and charges payable to the portfolio manager. The annexure shall contain details of levy of all applicable charges on a sample portfolio.
Most Important Terms and Conditions (MITC)
Portfolio managers must provide a "Most Important Terms and Conditions (MITC)" document, which shall be an abridged version of the original terms and conditions. The MITC must be acknowledged by the client.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on portfolio management agreements. Our securities law experts help clients draft compliant agreements, review existing agreements, and ensure regulatory compliance. Contact us for guidance on portfolio management agreements and other regulatory matters.