My friend, Shalini, had come to meet me in my office. After general catching up, she said “Kruti, I need your help with an idea I am thinking.”
“Sure, go ahead.”
“You know I was helping my dad all these years in his business. I am also managing my family’s stock portfolio for the past 5 years and it has given us decent returns. In fact, the size of the portfolio is in few crores.
Now, my relatives and few of my dad’s friends also want me to manage their portfolio. They are even ready to pay. I see an opportunity here to do something of my own.”
“That’s good Shalini. You should.”
“Well, I think I will. But I am not sure how does regulation come into picture here. I am sure there is SEBI registration and many other compliance that need to be taken care of. But frankly, I have no idea. Since you work with SEBI regulations, can you guide me?”
“Sure, I can. Tell me what do you intend to do? Only advice, advice with execution or something else?”
“Okay, what I want to do is take money from my clients and invest it on their behalf. So I do my own research based on which I will build a portfolio and execute the transactions too.”
“Sounds good, Shalini. What you are proposing is similar to a PMS or Portfolio Management Service. Its one of the hot investment products typically offered to HNI clients.”
“Yes, I am aware, our banker was pitching one to us. But I am happy to know more details from you.”
“Sure. Portfolio Management Service (PMS) as the name suggests is a product where a person manages portfolio of securities / funds of a client. Such person is called a “Portfolio Manager”. This business is regulated under SEBI (Portfolio Manager) Regulations, 1993.”
“Okay, is there any minimum amount of investment a client is required to make?”
“Yes, the minimum investment amount by a client is *Rs. 50 lacs either liquid money or via existing securities. You cannot accept anything less than this.”
“Oh, I see. Who can get the PMS License? Can I register myself as an Individual?”
“No, Shalini. SEBI PMS license is only given to a body corporate i.e. an LLP or a company. You cannot register as an Individual.
In the Memorandum of Association of your company or in the LLP agreement, you should make sure that you have the business objects clearly specified that you intend to provide services of a Portfolio Manager.
So, you need to form a company / LLP and also have people to help you. Interestingly, it is a regulatory requirement.
Even providing for the bare minimum number of people, you need a principal officer to take care of and be responsible for the PMS activities. In your case you can be the one. And since you have done MBA in Finance, you even fulfil the qualification requirements.
You need one more employee who have knowledge and experience in fund management activities.
And a compliance officer who will look after the compliances of the regulation. That makes it you plus 2 more people.”
“Oh, I see. Do I need to employ such people before making the application?”
I nodded.
“Okay, what about any capital requirements?”
“Yes, the minimum net worth of your company should be Rs. 5 crores. In case of LLP, the partners’ contribution should be totaling to Rs. 5 crores.”
“Oh, that’s a big requirement!” She was thinking.
“Tell me, do I have to take client’s permission every time make an investment?”
“Good question. Actually that depends. There are two types of services which you can provide – discretionary services and non-discretionary services.
In discretionary services, the discretion or the decision is of the Portfolio Manager, how he / she want to manage the funds. He need not take permission of the client.
In non-discretionary services, the manager has to manage the funds according to the directions of the client.
Every transaction made by the Portfolio Manager has to be as per the agreement between the Portfolio Manager and the client.”
Shalini nodded.
I continued. “You see, a portfolio manager has a fiduciary duty towards her clients. You need to be very careful with client’s money and ensure that you don’t misuse it. There is a disclosure document to be provided to client which has all the information, terms and conditions, including limitation of portfolio management services.
You need to have a separate bank account in a Scheduled Commercial Bank like HDFC Bank, ICICI Bank, State Bank of India, etc. to keep clients’ funds.
You need to tie up with brokers and custodians for management of clients’ securities. By the way, you need to mention all this in the application.”
“What about SEBI registration fees?”
“You need to pay Rs. 1 lac at the time of application. This fee is non-refundable. Once SEBI approves your application, you need to pay Rs. 10 lacs as registration fees. And subsequently, there is a renewal fees of Rs. 5 lacs every 3 years”
“Okay, this is quite a bit. But I understand this is necessary.”
“Yes. These are the requirements one should have before making the application. There is much more information to be provided at the time of making an application to SEBI. I can guide you when we start the same.”
“Okay Kruti. I had no idea of all this. I need to think it over and also discuss with my family. But I will definitely need your guidance before and while making an application to SEBI.”
“Sure Shalini. Your tea is getting cold.”
Here is a summary of the pre-requisites for application to SEBI for PMS license.
#1 – Formation of a company / LLP: SEBI PMS license is only given to a body corporate i.e. an LLP or a company. You cannot register as an Individual.
#2 – Clause in the Memorandum of Association (MoA): You need to ensure that you have a clause in the MoA of your company or the agreement of LLP specifying that the company intends to do business of portfolio management or management of securities.
#3 – Infrastructure requirements: You need to have an office space, office equipment, communication facilities, research facilities, etc.
#4 – *Appointment of Principal Officer: There should be an employee who will be designated as “principal officer”. He /she will be responsible for portfolio management activities.
There are qualification requirements for the principal officer:
- a professional qualification in finance, law, accountancy or business management from a university or an institution recognized by the Central Government or any State Government or a foreign university OR Post Graduate Program in Securities Market of not less than one year offered by NISM and
- an experience of at least five years in activities related to the securities market including in a portfolio manager, stock broker or as a fund manager (out of which at least 2 years of relevant experience should be in portfolio management or investment advisory services or in the areas related to fund management); and
- NISM – Series XXI -B – Portfolio Managers Certification.
#5 – *Appointment of one more person: You need to have at least 1 more person (employee) who fulfils the following requirements:
- A graduation degree from a university or an institution recognized by the Central Government or any State Government or a foreign university and
- At least two years of experience in activities related to portfolio management or stock broking or investment adviser or fund manager.
#6 – Appointment of Compliance Officer: You need to appoint a compliance officer who will be responsible for the compliance of requirements of the regulations. SEBI has clearly mentioned in the new PMS regulations that the role of compliance officer cannot be assigned to the principal officer or the employee of the portfolio manager.
#7 – *Capital requirements: the net worth of the company / LLP should be at least Rs 5 crores.
“net worth” means the aggregate value of paid up equity capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off.
The net worth should also be reduced by the minimum capital adequacy / net worth requirement for any other activity undertaken under other SEBI Regulations.
The minimum net worth should be maintained at all times.
#8 – Opening of account in Scheduled Commercial Bank: You need to open an account in a Scheduled Commercial Bank where the funds of the client will be kept.
#9 – *Appointment of custodian: You need to appoint a custodian for keeping the securities of the clients.
#10 – Tie up with Stock brokers: You need to have arrangements with stock brokers for portfolio management activities
*Update: SEBI has amended PMS regulations. Click here to read more.
If you have further queries or need professional help in making an application to SEBI, you can write to me at kruti@cskruti.com.
Is it possible for a dropout to open a PMS having adequate capital and knowledge required for running a PMS ,by hiring a principal officer and other employees as per SEBI regulations?
Yes, the person (dropout) can be a promoter and / or director / partner of the PMS entity and hire a principal officer (who will be the fund manager) and other employees to make an application for the PMS license.
Hi Kruti,
Thanks for the info.
Can PMS trade in futures and options( not for hedging ) in clients accounts? if same is written in contract…if yes is there any limitation of how much percentage can be used for FNO trading.
Thanks in advance.
Hi Prashant, in my view, PMS cannot invest funds of clients in futures and options.
Thanks for the useful information. Are there any softwares available in the market to manage PMS operations? If I have to manage so many portfolios in a non pooled manner, how do I do trade execution?
Hi. Yes there are softwares in the market. You can get in touch with the custodians registered with SEBI regarding the same.
Could you please share the proposal and checklist for getting PMS business registration. Post incorporation of Company with the said object.
Kindly mail at admin@iamclearmind.com
Sure, will send an email.
I an intd to start pms in delhi in a year time looking for a partner can you help
Hi Manish. I can help you with the application process as well as compliance post registration. Pls share more details / queries. You can email to kruti@cskruti.com.
Hi Kruti
Could you please share the proposal and checklist for getting PMS business registration. Post incorporation of Company with the said object.
Kindly mail at neerparwani94@gmail.com
Hi Neeraj, just sent you the email.
What is the qualification and experience required for a Principal Officer of a PMS Company to get SEBI Approval
Here are the details –
i) a professional qualification in finance, law, accountancy or business management from a university or an institution recognized by the Central Government or any State Government or a foreign university or a CFA charter from the CFA institute;
ii) experience of at least five years in related activities in the securities market including in a portfolio manager, stock broker, investment advisor, research analyst or as a fund manager
Hi Kriti,
As a portfolio management company, are we allowed to invest our client’s money into forex market?
Hi Mahesh, as PMS company you can invest funds of his clients in the securities listed or traded on a recognized stock exchange, money market instruments, units of Mutual Funds and other securities as specified by SEBI.
Hello mam..
These days there are lot of so called PMS services floating around which are not SEBI registered and which trade on behalf of the individuals. These services cater for both HNI and normal clients. Are these Services legal? One of my friend lost huge amount of money to one of these services and now doesn’t know what to do. Is there any legal stand against such services?
Thanks
Hi Praveen, I am not sure, which services are you taking about. You can always complain to SEBI about the registered / unregistered entities in securities market. SEBI has its platform called SCORES – https://scores.gov.in/scores/Welcome.html
Hope this helps.
I have a query regarding net worth requirements
Suppose a body corporate open Demat account and purchase equity securities more than 5 cr in its name .whether those investments can be considered in net worth requirement
As per SEBI PMS regulations, “net worth” means the aggregate value of paid up equity capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off. SO its the capital of the company. Are you asking about putting the capital of company to end use?
Nicely explained Krutiji.
If I want to start advising on the basis of my research (without execution) and the clients execute their trades at their own on the basis of my advise, then in that scenario, what regulations are to be followed?
Thanks Piyush. You can either get registered as an Investment Adviser (IA) or as a Research Analyst (RA) with SEBI. Here is the link to my article to start with – https://cskruti.com/should-i-register-with-sebi-as-investment-adviser-or-research-analyst/
You will find all the relevant information about RA and IA on my blog.
An absolute eye opener and exactly what I was looking to know. Thank you Kruti. Thank you. I need to put this aside 🙂
Not my cup of tea but at least now i’m informed…
Thanks Mukund.
Namaste. some of my indian resident friends (all school mates or their relatives) are forming an LLP in india by pooling in few laksh each. While they are looking for ventures to invest their money, they want use the capital to invest in market index options as treasury ops… is this allowed…? do they need SEBi approval…
Namaste. They may need RBI approval as such kind of activity may be considered as NBFC activity. Pls refer to this article for more information – https://cskruti.com/does-my-company-need-non-banking-finance-company-nbfc-registration/
Hello,
Can you please send me stats that how much we have to invest and how it’s works in simple way so I can understand easily because I am an engineer by profession and I am wanting to change my profession.
Mail id – hgpatel19@gmail.com
Hi Harsh, basic requirement –
1. You need to have a company / LLP
2. networth requirement is Rs. 5 crore
3. SEBI fees is Rs. 11 lakhs
4. Need to have a team who fulfills requirement as per SEBI regulations
If you have further queries, pls write to me at kruti@cskruti.com
Does this apply for Digital Assets eg Bitcoin too ?
Hi. If I understand you question correctly, PMS regulations do not apply to managing Digital Assets as in my view they not considered as securities under SEBI regulations.
Hiee Kruti
Can me send me your quotation for PMS?
camkagarwal49@gmail.com
Hi Mayank. I have sent an email to you with details. Hope you have received it.
Thank you
HI
Is there any requirement that as a PMS we should trade only in equities, debt ? Can we trade in Currencies and commodities too?
Hi Arun, Portfolio Manager can invest in shares, mutual funds, money market instruments and derivatives.
Can we invest in ulips provided by Insurance companies ? They are basically insurance + Mutual fund
Hi Prasad, a discretionary portfolio manager can invest in securities listed or traded on recognised stock exchange, mutual funds, commercial paper, trade bill, treasury bills, certificate of deposit and usance bills. Since ULIPs are insurance products they are not covered under “securities”. Hence you cannot invest in ULIPs.
Is there a way to include ulips for clients in combination with securities and derivatives ?
Hi Prasad, not sure if there is any such way.
Good blog Kruti.
Does Degree in MS in Data Science from USA holds fulfills the criteria for Principal Officer.
Hi Harshad. Thanks. You need professional qualification in finance, law, accountancy or business management to fulfill the qualification requirement.
Very helpful information, thanks.
Thanks Rohite. Are you looking to apply for PMS license? PLs let me know.