A fundamental feature of portfolio management services is that securities are held in the client's own demat account. This article explains the regulatory rationale behind this requirement.
The Regulatory Requirement
Legal Basis
Regulation 24(15) of the SEBI (Portfolio Managers) Regulations, 2020 provides that the portfolio manager shall not hold the securities belonging to the portfolio account, in its own name on behalf of its clients either by virtue of contract with clients or otherwise.
Implementation
Securities of the clients are held in separate demat accounts and the clients can verify their holdings and their investments in a portfolio.
Client Ownership
Since the securities remain in the beneficial ownership of the client, they can be used as collateral for loans at the client's discretion.
Regulatory Rationale
Investor Protection
The primary rationale is investor protection. Holding securities in the client's own demat account ensures that:
- Client assets are protected from the portfolio manager's creditors
- There is no risk of commingling with the portfolio manager's assets
- Clients have direct ownership of their securities
Transparency
The demat-in-client-name model provides:
- Direct visibility of holdings to clients
- Easy verification of transactions
- Clear audit trail
Prevention of Misuse
Holding securities in the client's name prevents:
- Misuse of client assets by the portfolio manager
- Unauthorized transactions
- Commingling of client assets
Bankruptcy Protection
In case of bankruptcy of the portfolio manager, client assets held in the client's name are protected from the portfolio manager's creditors.
Comparison with Mutual Funds
Mutual Funds
In mutual funds, assets are held in the name of the mutual fund scheme. Investors hold units of the scheme, not direct ownership of the underlying securities.
PMS
In PMS, securities are held in the client's own demat account. Clients have direct ownership of the securities.
Key Difference
The difference reflects the distinct nature of the two products:
- Mutual funds: Pooled investment with collective ownership
- PMS: Individual investment with direct ownership
Benefits for Clients
Direct Ownership
Clients have direct ownership of securities, not just units in a pool.
Verification
Clients can directly verify their holdings through their demat account.
Control
Clients retain control over their securities, subject to the portfolio management agreement.
Transparency
The arrangement provides complete transparency in holdings and transactions.
Benefits for Portfolio Managers
Simplified Reporting
Portfolio managers can easily report client holdings through demat statements.
Reduced Risk
The arrangement reduces the risk of misuse or commingling of client assets.
Regulatory Compliance
The arrangement ensures compliance with segregation requirements.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS custody and segregation compliance. Our securities law experts help portfolio managers implement compliant custody arrangements and ensure regulatory compliance. Contact us for guidance on custody and other regulatory matters.