Regulation 14 - Contract with clients and disclosures - Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993

1 [14. Contract with clients and disclosures.─ (1) (a) The portfolio manager shall, before taking up an assignment of management of funds or portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV. (b) The agreement between the portfolio manager and the client shall, inter alia, contain: (i) the investment objectives and the services to be provided; (ii) areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or industry; (iii) type of instruments and proportion of exposure; (iv) tenure of portfolio investments; (v) terms for early withdrawal of funds or securities by the clients; (vi) attendant risks involved in the management of the portfolio; (vii) period of the contract and provision of early termination, if any; (viii) amount to be invested subject to the restrictions provided under these regulations; (ix) procedure of settling client's account including form of repayment on maturity or early termination of contract; (x) fees payable to the portfolio manager; (xi) 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); (xii) custody of securities 1 [ and goods ] ; (xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager; (xiv) the terms of accounts and audit and furnishing of the reports to the clients as per the provisions of these regulations; and (xv) other terms of portfolio investment subject to these regulations. (2) (a) 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, at least two days prior to entering into an agreement with the client as referred to in sub-regulation (1). (b) The Disclosure Document, shall inter alia contain the following─ (i) 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); (ii) portfolio risks; (iii) complete disclosures in respect of transactions with related parties as per the accounting standards specified by the Institute of Chartered Accountants of India in this regard; (iv) the performance of the portfolio manager: Provided that the performance of a discretionary portfolio manager shall be calculated using weighted average method taking each individual category of investments for the immediately preceding three years and in such cases performance indicators shall also be disclosed; (v) the audited financial statements of the portfolio manager for the immediately preceding three years. (c) The contents of the Disclosure Document shall be certified by an independent chartered accountant. (d) The portfolio manager shall file with the Board, a copy of the Disclosure Document before it is circulated or issued to any person and every six months thereafter or whenever any material change is effected therein whichever is earlier, along with the certificate in Form C as specified in Schedule I. (3) (a) 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. (b) The portfolio manager may, subject to the disclosure in terms of the Disclosure Document and specific permission from the client, charge such fees from the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced).] ****** 1 Substituted by the SEBI (Portfolio Managers) (Amendment) Regulations, 2002, w.e.f. 11-10-2002. Prior to substitution, regulation 14 read as under: 14. Contract with clients.─ (1) (a) Every portfolio manager shall before taking up an assignment of management of portfolio on behalf of a client, enter into an agreement with such client clearly defining the inter-se relationship, and setting out their mutual rights, liabilities and obligations relating to management of the portfolio of the client. (b) The contract shall, inter alia, contain; - (i) the investment objectives and the services to be provided; (ii) areas of investment and restrictions, if any, imposed by the client with regard to investment in a particular company or industry; (iii) attendant risks involved in the management of the portfolio; (iv) period of the contract and provision of early termination, if any; (v) amount to be invested; (vi) procedure of settling client's account including form of repayment on maturity or early termination of contract; (vii) fees payable to the portfolio manager; (viii)custody of securities. (2) The funds of all clients shall be placed by the portfolio manager in a separate account to be maintained by him in a scheduled commercial bank. Explanation.─ For the purposes of this sub-regulation scheduled bank means any bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (3) The portfolio manager shall charge an agreed fee from the client for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly any return and such fee shall be independent of the return to the client and shall not be on a return sharing basis. ******** Notes 1. Inserted vide NOTIFICATION No. SEBI /LAD- NRO /GN/2019/17 dated 10-05-2019