Regulation 22 - Contract with clients and disclosures - Securities And Exchange Board of India (Portfolio Managers) Regulations, 2020

Contract with clients and disclosures. 22. (1) 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 containing the details as specified in Schedule IV 1 [ : ] 2 [ Provided that the contents of agreement specified under Schedule IV of these regulations shall not apply to the agreement between the portfolio managers and the large value accredited investors. ] 7 [ (1A) The portfolio manager may make investments in the securities of its related parties or its associates only after obtaining the prior consent of the client in such manner as may be specified by the Board from time to time: Provided that the requirement for obtaining consent shall not apply to such portfolio managers as may be specified by the Board. ] (2) The agreement between the portfolio manager and the client shall, inter alia, include the following :- (a) the investment objectives and the services to be provided; (b) period of the contract and provision of early termination, if any; (c) investment approach, areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or industry; Explanation : An investment approach is a broad outlay of the type of securities and permissible instruments to be invested in by the portfolio manager for the customer, taking into account factors specific to clients and securities. (d) type of instruments and proportion of exposure; (e) tenure of portfolio investments; (f) terms for early withdrawal of funds or securities by the clients; (g) attendant risks involved in the management of the portfolio; (h) amount to be invested subject to the restrictions provided under these regulations; (i) procedure of settling client s account including form of repayment on maturity or early termination of contract; (j) fees payable to the portfolio manager; (k) the quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced); (l) custody of securities; (m) in case of a discretionary portfolio manager; a condition that the liability of a client shall not exceed his investment with the portfolio manager; (n) accounting terms, audit and furnishing of the reports to the clients as per the provisions of these regulations; and (o) other terms of portfolio investment subject to these regulations. 3 [ Provided that in case of the Co-investment Portfolio Manager, the terms of co-investment in an investee company by a co-investor, shall not be more favourable than the terms of investment of the Alternative Investment Fund: Provided further that in case of the Co-investment Portfolio Manager, the terms of exit from the Co-investment in an investee company including the timing of exit shall be identical to the terms applicable to that of exit of the Alternative Investment Fund: Provided further that in case of the Co-investment Portfolio Manager, the early withdrawal of funds by the co-investors with respect to Co-investment in investee companies shall be allowed to the extent that the Alternative Investment Fund has also made an exit from respective investment in such investee companies. ] (3) The portfolio manager shall provide to the client, the Disclosure Document as specified in Schedule V , along with a certificate in Form C as specified in Schedule I , prior to entering into an agreement with the client as referred to in sub-regulation (1). (4) The Disclosure Document, shall inter alia include the following : (a) 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 (where such service is out sourced); (b) portfolio risks including risk specific to each investment approach offered by the portfolio manager; (c) complete disclosures of transactions with related parties as per the accounting standards specified by the Institute of Chartered Accountants of India; (d) details of conflicts of interest related to services offered by group companies or associates of the portfolio manager; 8 [ (da) the details of investment of client s funds by the portfolio manager in the securities of its related parties or associates; (db) the details of diversification policy of the portfolio manager: Provided that the requirements specified above at clauses (da) and (db) above shall not apply to such portfolio managers as may be specified by the Board: Provided further that the Board may specify disclosure requirements other than the requirements specified at clauses (da) and (db) above; ] (e) the performance of the portfolio manager: Provided that the performance of a discretionary portfolio manager shall be calculated using Time Weighted Rate of Return for the immediately preceding three years and in such cases performance indicators shall also be disclosed: 4 [ Provided further that the performance of the Co-investment Portfolio Manager shall be calculated in the manner as agreed between the Co-investment Portfolio Manager and the client: ] Provided further that the portfolio manager may be allowed to disclose performance segregated on the basis of investment approach; (f) the audited financial statements of the portfolio manager for the immediately preceding three years. (5) The contents of the Disclosure Document shall be certified by an independent chartered accountant. (6) 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 5 [ : ] 6 [ Provided that the requirement under this sub-regulation shall not apply to Co-investment Portfolio Manager. ] (7) The portfolio manager shall file with the Board, a copy of the Disclosure Document after grant of certificate of registration before circulating it to any client or whenever any material change including change in the investment approach is effected. The portfolio manager shall file the disclosure document with the material change within 7 working days from the date of the change. (8) The portfolio manager shall file disclosure document along with the certificate in Form C as specified in Schedule I. (9) The portfolio manager shall disclose a change in the identity of the Principal Officer to the Board and the clients within 7 working days of effecting the change. (10) The portfolio manager shall report its performance uniformly in the disclosures to the Board, marketing materials and reports to the clients and on its website. (11) The portfolio manager shall charge an agreed fee from the clients for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return and the fee so charged may be a fixed fee or a return based fee or a combination of both: Provided that no up-front fees shall be charged by the portfolio manager directly or in-directly to the clients. (12) The portfolio manager shall disclose the range of fees charged under various heads in the disclosure document. ************* NOTES:- 1. Substituted vide Notification No. SEBI/LAD-NRO/GN/2021/31 dated 03-08-2021 before it was read as . 2. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/31 dated 03-08-2021 3. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/58 dated 09-11-2021 w.e.f. 09-12-2021 4. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/58 dated 09-11-2021 w.e.f. 09-12-2021 5. Substituted vide Notification No. SEBI/LAD-NRO/GN/2021/58 dated 09-11-2021 w.e.f. 09-12-2021 before it was read as . 6. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/58 dated 09-11-2021 w.e.f. 09-12-2021 7. Inserted vide Notification No. SEBI/LAD-NRO/GN/2022/94 dated 22-08-2022 w.e.f. thirtieth day from the date of their publication in the Official Gazette 8. Inserted vide Notification No. SEBI/LAD-NRO/GN/2022/94 dated 22-08-2022 w.e.f. thirtieth day from the date of their publication in the Official Gazette