This blog provides a structured guide on SEBI’s risk management and client protection requirements, covering portfolio segregation, trade execution fairness, distributor supervision, and grievance redressal compliance.
March 04, 2024
Portfolio Segregation & Fund Allocation Policies
Portfolio Managers must maintain strict segregation of client funds to ensure transparency and avoid misuse.
SEBI’s Portfolio Segregation Guidelines
✔ Client-wise Fund & Securities Segregation – Each client’s portfolio must be maintained separately, ensuring no cross-utilization of funds.
✔ Prohibition on Pooling Client Funds – SEBI prohibits pooling of client assets, except for investments in mutual funds or AIFs where pooling is inherent.
✔ No Internal Trading Between Client Portfolios – PMS providers cannot transfer securities between different client accounts unless explicitly authorized.
Example: A Portfolio Manager handling Client A’s funds of ₹1 crore cannot use any part of it to purchase securities for Client B, even temporarily.
Fair Trade Execution & Equal Treatment of Clients
PMS providers must ensure equitable treatment for all clients in trade execution, pricing, and allocation.
Trade Execution Fairness Rules
✔ All clients must receive equal trade execution priority – Portfolio Managers cannot favour one client over another while executing trades.
✔ Bulk Trade Allocation Policy – If trades are executed in bulk, they must be allocated fairly among all clients at the same price.
✔ Conflict-Free Pricing – Clients must not be charged different prices for the same security unless explicitly agreed upon.
Example: If a Portfolio Manager buys 1,000 shares of a stock at ₹500 per share for multiple clients, the allocation must be done at the same price per share for all clients.
Risk Management & Internal Controls for PMS
SEBI mandates a strong risk management framework to mitigate portfolio risks and regulatory breaches.
Key Risk Control Measures
✔ Daily Portfolio Monitoring – PMS providers must review portfolios daily for exposure breaches.
✔ Exposure Limits & Diversification – No over-concentration in single stocks or sectors beyond prescribed SEBI limits.
✔ Stop-Loss & Hedging Policies – Portfolio Managers must document and implement risk-mitigation strategies such as stop-loss mechanisms and derivative hedging.
✔ Periodic Stress Testing – SEBI requires PMS firms to conduct portfolio stress tests under different market scenarios.
Example: If a stock holding drops 20% in a day, PMS firms must have predefined rules for stop-loss execution or hedging actions.
PMS Distributor Supervision & Compliance
PMS distributors play a critical role in client acquisition, and SEBI has imposed strict compliance requirements to prevent mis-selling.
SEBI’s PMS Distributor Guidelines
✔ Client Suitability Assessment – Distributors must evaluate whether a PMS is suitable for a prospective client before recommending it.
✔ No Misleading Sales Practices – Distributors cannot guarantee returns or make false claims about performance.
✔ Disclosure of Distributor Commissions – Any commission paid to PMS distributors must be transparently disclosed to the client.
Example: If a distributor receives 2% commission for onboarding a client, this must be explicitly stated in the client agreement.
Conflict of Interest Management & Related-Party Transactions
PMS firms must identify, disclose, and mitigate conflicts of interest to protect investor interests.
SEBI’s Conflict Resolution Requirements
✔ Related-Party Investments Capped at 30% – PMS firms cannot invest more than 30% of a client’s AUM in related-party securities.
✔ Pre-Approval for Conflict Transactions – Any transactions involving PMS providers’ own group companies require prior client approval.
✔ Quarterly Disclosure of Related-Party Holdings – Clients must be informed every quarter about any holdings in associated companies.
Example: If a PMS firm invests ₹10 crore in bonds issued by its own parent company, this must be pre-approved by the client and reported in quarterly statements.
Client Grievance Redressal & Transparency Standards
SEBI enforces strict investor grievance redressal norms to ensure fair treatment of clients.
Mandatory Grievance Redressal Mechanism
✔ Dedicated Complaint Handling System – PMS providers must have a structured process to address client complaints.
✔ SEBI SCORES Integration – Investors must have access to SEBI’s SCORES platform for lodging complaints.
✔ Monthly Complaint Status Disclosure – PMS providers must update their website every month with:
Total complaints received.
Resolved and pending complaints.
Complaints older than 30 days.
Disclaimer
For detailed risk management and Internal Controls for PMS, please refer to SEBI’s official website (www.sebi.gov.in). This content is for informational purposes only and should not be considered legal advice.
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