First-time HNIs must bring in Rs 5 lakh, PMS told to disclose portfolio performance THE Securities and Exchange Board of India (Sebi) tightened the rules for portfolio managers on Tuesday, by which the first lump-sum investment amount they accept as funds or securities from clients should not be less than Rs 500,000.
Sebi, in a circular, also asked portfolio managers to disclose the performance of portfolios grouped by investment category for the past three years as per a prescribed format.
"Portfolio managers shall ensure that the disclosure document is given to all clients along with the account opening form at least two days in advance of signing the agreement. In order to ensure that the clients have access to updated information about the portfolio manager, portfolio managers should place the latest disclosure document on their website, wherever pos sible," the regulator said.
Sebi said the step was taken after it was found that many portfolio managers were not making adequate disclosure regarding portfolio performance in the disclosure document.
There have also been instances of portfolio managers accepting funds or securities less than Rs 500,000 from clients and opening accounts on the basis of the client's commitment that Rs 500,000 will be brought soon.
The step is intended to bring about greater uniformity, clarity and transparency in the way portfolio managers deal with clients.
Sebi has also asked portfolio managers not to organise investment portfolios as `schemes' akin to mutual fund schemes while marketing their services to clients.
Early last month, Sebi directed portfolio managers to calculate profit or performance on the basis of the high watermark principle over the life of the investment.
High watermark principle means the manager receives performance fees only on increases in the net asset value (NAV) of the fund in excess of the highest NAV it has previously achieved.
For example, if a fund was launched at an NAV per share of Rs 1,000, which then rose to Rs 1,200 in its first year, a performance fee would be payable on the Rs 200 return for each share.
If in the next year it dropped to Rs 1,100, no fee would be payable. If in the third year the NAV rose to Rs 1,300, a performance fee would be payable only on the Rs 100 profit -from Rs 1,200 (the high watermark) to Rs 1,300 -rather than on the full return during that year -from Rs 1,100 to Rs 1,300.
High watermarks are intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades.
If a high watermark is not used, a fund that ends alternate years at Rs 1,000 and Rs 1,100 would generate a performance fee every other year, enriching the manager but not the investors.
