“Kruti, let’s start the internal audit next month. We still have time before the due date, right?”
That is usually how our conversation, with the portfolio management (PMS) firms, begins.
PMS internal audit is a part of the corporate governance reporting. Each year, the PMS internal audit functions as more than a regulatory requirement — it acts as a governance stress test.
PMS firms think that they are compliant – on paper, everything appeared in order.
Client agreements were executed.
Disclosure documents were shared.
Policies are presumed updated.
But when we began mapping their processes against the post-registration obligations, the gaps became visible – not in intent, but in documentation, operations and reporting.
The question is not whether your PMS has complied.It is about being able to demonstrate, through records and systems, that the right things were done — consistently.
In this post, we outline the most common observations from our previous years audits. These are the critical areas the PMS entities must review before their annual audit.
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1 – Failure to maintain the minimum Net Worth
Every Portfolio Management entity is required to maintain a minimum net worth of Rs. 5 crores at all times.
In our audits, we observed instances where net worth dipped below Rs. 5 crores, even for a brief period. The shortfall gets flagged through periodic filings on the SI portal and through SEBI inspections. Even temporary dips can invite regulatory attention!
It is required to maintain a comfortable buffer ideally above Rs. 5 crores to prevent temporary dips due to operational or accounting movements.
2 – Absence of Investment Rationales
Many Portfolio Managers fail to document rationales for every investment decision made or recommended during the year. Each rationale must clearly explain the analytical basis of the investment decision by a portfolio manager.
Rationales are not optional — they are a core regulatory requirement and an essential part of record maintenance.
During audits, we observed that the rationale were inadequately maintained.
3 – Non-maintenance of minimum contribution from a client
As per the SEBI PMS regulations, the minimum investment per client is Rs. 50 lakhs, which may be maintained in the form of funds or securities.
A common misconception is that this requirement applies only at the time of onboarding. However, the regulatory position is clear — the client must maintain Rs. 50 lakhs at all times. If withdrawals reduce the portfolio value below this threshold, the client must immediately top up.
4 – Incomplete or Outdated Disclosure Document
SEBI recently revised the format of the Disclosure Document (DD).
During our audit, we have noticed that the portfolio managers are still using outdated formats with missing information. :
Here are the key requirements:
- Updated format must be adopted and uploaded on the website.
- The DD Must be shared with all clients.
- DD must be accompanied by Form C certified by the Principal Officer as well as a certificate from a Chartered Accountant.
5 – Delay in periodic reporting and filing of reports
Portfolio Managers are required to submit monthly reports on SEBI and Association of Portfolio Managers in India (APMI) portals and quarterly reports to clients in the formats prescribed by APMI. Click here to know more details about the periodic reporting.
Delays and errors were observed in monthly, offsite, and other compliance filings, which are routinely flagged as regulatory non-compliances.
In some cases, we also observed that, though the policies were maintained, they were not adequately followed.
Timely and accurate reporting and compliance is essential for maintaining transparency and regulatory credibility.
6 – Failure to intimate material changes to SEBI
All material changes must be intimated to SEBI within prescribed timelines.
Material changes include change in control of the Portfolio Manager, Principal Officer, fees charged, charges associated with the services offered, investment approaches offered and such other changes
We have observed that either the changes are not informed to SEBI or a delayed intimation is sent which will be considered as a non-compliance.
7 – Assurance or Guarantee of Returns
In certain cases, portfolio managers informally assured guaranteed returns or fixed monthly payouts.
This violates the Code of Advertisement under SEBI (Portfolio Managers) Regulations, 2020. Even verbal commitments can be treated as misrepresentation.
The returns communicated with the clients should be as reported to SEBI and APMI.
8 – Failure to renew NISM Certification
The Principal Officer must hold a valid NISM-Series-XXI-B certification at all times.
We have observed instances where the certificate was not renewed within the due date.
9 – Non-conduct of Internal Audit
Even if you have recently started the operations, internal audit is still mandatory. An audit is not merely a compliance formality; it is an annual health check of your governance architecture.
We have observed that the portfolio management firms have missed getting the internal audit conducted. Also, in some cases, the audit was merely a ‘’tick audit” where the auditor had missed pointing out the gaps in the corporate governance.
10 – Segregation of funds
A Portfolio Manager is required to maintain client funds in a separate bank account with a scheduled commercial bank.
During the review, it was observed that the Portfolio Manager failed to ensure proper segregation in respect of eligible investment funds. Specifically the funds and securities of eligible investment funds were not maintained separately from those of other clients.
These observations indicate non-adherence to the prescribed segregation and record – keeping requirements.
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The due date for the corporate governance reporting is approaching.
The internal audit must be conducted by a practicing Company Secretary or a practicing Chartered Accountant indicating the quality of internal procedures followed by the Portfolio Manager.
Based on the audit report, the Principal Officer of the PMS has to submit a Corporate Governance Report to SEBI within 30 days from the end of the financial year, i.e. latest by 30th April.
However, regulatory compliance under the SEBI PMS framework is not a once-a-year audit event — it is a continuous governance discipline. Firms that treat compliance as an embedded operational function, rather than a post-facto correction exercise, consistently navigate audits with confidence and credibility.
With the audit due date approaching, now is the time to conduct an internal gap assessment.
If you have not initiated your audit readiness review, this is the right moment to act.
If you need assistance with the internal audit, you can write to us to kruti@cskruti.com.