The Securities and Exchange Board of India (SEBI) has proposed that portfolio management service (PMS) firms should charge profit sharing/performance related fees on the basis of high water mark principle.
In a consultative paper issued on July 27, the market regulator said that once the portfolio rises to a certain peak and the portfolio manager charges fee for it, the next time he could charge a fee only if the portfolio value is above the previous peak.
For example, consider that frequency of charging performance fees is annual. A client's initial contribution is Rs 10,00,000, which then rises to Rs.12,00,000 in its first year, a performance fee/profit sharing would be payable on the Rs 2,00,000 return. In the next year, the base value of the portfolio becomes Rs 12,00,000 and the portfolio manager can charge fee only if the portfolio rises above Rs 12,00,000. If in the second year, the portfolio drops to Rs 11,00,000, no performance fee would be payable. If in the third year the Portfolio rises to Rs.13,00,000, a performance fee/profit sharing would be payable only on the Rs1,00,000 profit which is portfolio value in excess of the previously achieved high water mark of Rs 12,00,000.
For the purpose of charging performance fee, the frequency should not be less than quarterly.
In case of partial withdrawal of funds by investors, all fees and charges should be charged proportionately and the high watermark should be adjusted accordingly.
The regulator further said that in order to ensure transparency and adequate disclosure regarding fees and charges, the client agreement should contain a separate annexure that should list all fees and charges payable to the portfolio manager.
"The client is required to separately sign the annexure on fees and charges and add in his own handwriting that he has understood the charge structure," SEBI said.
Head of the PMS group of a mutual fund house said on the condition of anonymity that it is good step towards bringing more clarity on the issue of fee. "Investors would certainly benefit if there is more clarity on such issues," he added.
