A portfolio manager is the most fiduciary of all market intermediaries: the client physically surrenders funds and securities and, in the discretionary model, surrenders the very power to decide what is bought and sold. The SEBI (Portfolio Managers) Regulations, 2020, which replaced the 1993 Regulations with effect from 16 January 2020, tighten entry barriers, professionalise the manager's organisation, and erect a detailed fee, disclosure and conduct architecture around that surrendered discretion. For the judiciary and CLAT-PG aspirant, the chapter sits at the intersection of intermediary registration, fiduciary duty and SEBI's enforcement reach, and rewards precise recall of the headline numbers and the conduct standards.
Statutory pedigree and the 2020 recast
The Regulations are subordinate legislation framed under Section 30 read with Section 12 of the SEBI Act, 1992, the section that prohibits any person from carrying on the activity of a portfolio manager except under a certificate of registration. The 2020 Regulations superseded the 1993 Regulations, retaining the conceptual spine but raising the financial and organisational bar substantially. The legislative philosophy is the one the Supreme Court repeatedly affirms: SEBI's powers are to be read expansively in the service of investor protection. In Sahara India Real Estate Corporation Ltd. v. SEBI, (2012) 10 SCC 603, the Court held that investor protection is the paramount object and that the form of an instrument or arrangement cannot be used to escape SEBI's regulatory reach. The same purposive lens informs the reading of these Regulations, where the manager's discretion over client money is precisely the mischief being controlled.
The portfolio manager is one of a family of intermediaries that SEBI registers and supervises; the shared registration machinery is consolidated in the SEBI (Intermediaries) Regulations, 2008, which supplies the common procedure for applications, fit-and-proper assessment, inspection and enforcement. The 2020 Regulations should always be read alongside that common framework and the broader scheme set out on the SEBI Intermediaries Regulations hub.
Who is a portfolio manager: the three models
Under Regulation 2, a portfolio manager is a body corporate which, pursuant to a contract with a client, advises, directs or undertakes on the client's behalf the management or administration of a portfolio of securities or the client's funds. The definition deliberately captures both the hands-on manager and the pure adviser, because the common thread SEBI regulates is the entrustment of investment judgment.
The Regulations recognise three operating models. A discretionary portfolio manager exercises, or may exercise, discretion as to the investment of the client's funds or the management of the client's securities; the client surrenders the buy-sell decision entirely. A non-discretionary portfolio manager manages funds in accordance with the directions of the client and does not exercise discretion over individual buy or sell decisions. An advisory portfolio manager only advises the client on investments, leaving execution to the client. The distinction is not academic: it drives the custodian requirement, the permitted investment universe and the intensity of the fiduciary obligation. The deepest duty attaches to the discretionary manager, who alone holds the client's cheque-book.
Registration: application, fit-and-proper and grant
Regulation 3 requires every applicant to apply to SEBI in Form A with the prescribed fee. Registration is the jurisdictional gateway: Section 12 of the SEBI Act makes carrying on the activity without a certificate an offence, and the consequences of acting without registration are penal and serious. SEBI considers, among other things, whether the applicant is a body corporate, whether it has the necessary infrastructure and qualified manpower, and whether the applicant, its directors and principal officer are fit and proper persons within the meaning of the Intermediaries Regulations, 2008.
The breadth of SEBI's gatekeeping and debarment power has been judicially endorsed. In SEBI v. Ajay Agarwal, (2010) 3 SCC 765, the Supreme Court held that an order restraining a person from accessing the securities market and from dealing in securities is regulatory and preventive, not a 'penalty' attracting the bar on ex post facto laws; SEBI may legitimately keep undesirable persons out of the market. That reasoning underpins the fit-and-proper enquiry at the registration stage and the cancellation power at the enforcement stage.
Net worth: the jump to Rs 5 crore
The single most examinable number in the 2020 recast is the enhanced net-worth requirement. The Regulations raise the minimum net worth of a portfolio manager from the earlier Rs 2 crore to Rs 5 crore. Net worth is computed as the aggregate value of paid-up capital and free reserves, reduced by the aggregate value of accumulated losses, deferred expenditure not written off and miscellaneous expenditure not written off. The requirement is a continuing one, not merely a condition of entry: a manager must maintain the prescribed net worth throughout the period of registration.
Recognising that the leap from Rs 2 crore would otherwise instantly disqualify a large part of the industry, the Regulations grant existing portfolio managers a transition window of 36 months from the commencement of the 2020 Regulations to build their net worth up to Rs 5 crore. The capital floor mirrors, in function, the prudential cushions SEBI imposes on other intermediaries such as the net-worth and deposit norms discussed in the notes on stock-brokers' capital adequacy, the common theme being that those who handle client assets must themselves be financially substantial.
Organisational competence: principal officer, compliance officer and the fund-management hand
The 2020 Regulations professionalise the manager's organisation through Regulation 7. The principal officer must possess a professional or post-graduate qualification, a minimum of five years' experience in activities related to the securities market (of which at least two years must be in portfolio management, investment advisory or fund-management-related areas) and the relevant NISM certification specified by SEBI. The principal officer is the person responsible for the manager's investment decisions and operations.
Critically, the Regulations now mandate at least one additional employee with decision-making authority in fund management, who must satisfy the same qualification and experience standards as the principal officer, so that the manager is not a one-person dependency. Separately, every portfolio manager must appoint a compliance officer responsible for monitoring compliance with the SEBI Act, rules, regulations and directions and for redressal of investor grievances. The compliance function is intended to be independent of the principal officer's investment function. Existing managers were given the same 36-month window to meet these enhanced eligibility norms.
Minimum investment of Rs 50 lakh: keeping retail out
Regulation 23 fixes the client floor: a portfolio manager shall not accept from a client funds or securities worth less than Rs 50 lakh. This doubled the earlier Rs 25 lakh threshold and is the regulatory device by which SEBI deliberately keeps small retail investors out of portfolio management, channelling them instead toward mutual funds and other pooled products with their own retail safeguards. The premise is that an investor surrendering discretion over a large, individually-managed corpus should be sophisticated enough to understand the risk.
Where a client tops up an existing portfolio, the topped-up amount must, together with the existing corpus, respect the floor; existing investments below the new floor that predate the 2020 Regulations may continue until maturity or withdrawal but cannot be used as a back-door for fresh sub-threshold inflows. The floor is relaxed only for accredited investors, discussed below, reflecting that the Rs 50 lakh proxy for sophistication is unnecessary where sophistication is independently certified.
Where the money may go: the permitted investment universe
Regulation 24 governs investment of clients' funds and is structured around the discretionary-advisory divide. A discretionary portfolio manager may invest only in listed securities, money-market instruments, units of mutual funds and such other securities or instruments as SEBI specifies; the discretionary manager is thus confined to a relatively liquid, transparent universe precisely because the client has surrendered the power to vet each trade. A non-discretionary or advisory manager may invest or advise on investment in unlisted securities up to a cap of 25 per cent of the assets under management of such clients, reflecting that the client there retains a measure of control.
To curb a long-standing conflict, where a portfolio manager invests client funds in mutual fund units it must do so only through direct plans, and the manager may not earn or retain any distribution commission on such investment; any commission received must be deducted from the manager's own fees. Regulation 24 also restricts off-market transfers of securities from a client's account except in narrowly specified circumstances such as inter-se client transactions, tax payments or operational necessities, closing a route through which client securities could be diverted.
Segregation, custody and the safety of client assets
The Regulations insist that client funds and securities be kept segregated and identifiable, and that the portfolio manager not derive any benefit from the client's funds or securities and not pledge or give on loan a client's securities to a third party without the client's specific authorisation. Every portfolio manager must appoint a custodian in respect of the securities and goods managed, the sole exception being a manager providing only advisory services, where there is no custody to safeguard. This universalised the custodian requirement, which under the earlier regime applied only above an AUM threshold.
The discipline around client-asset segregation is the same that SEBI enforces against brokers, and its breach attracts severe consequences. The enforcement action over alleged misuse of clients' securities in the Karvy Stock Broking matter, where the Securities Appellate Tribunal directed SEBI to reconsider aspects of its order, illustrates both the seriousness with which SEBI treats commingling and the appellate scrutiny SEBI orders attract. The parallel conduct expectation for brokers is detailed in the notes on the stock-brokers' code of conduct.
Fees: high water mark, hurdle rate and the bar on hidden charges
The Regulations and the accompanying SEBI circular framework regulate what the manager may charge. A portfolio manager may levy a fixed management fee and, where agreed, a performance-based fee; but performance fees must be charged only on the basis of the high water mark principle, meaning the manager earns a performance fee only on the increase in portfolio value above the highest value previously achieved on which a performance fee was already charged. The client is therefore never made to pay twice for recovering the same loss, and the manager cannot collect a performance fee while the portfolio remains below its earlier peak. A hurdle rate, where contractually fixed, sets a minimum annualised return below which profit-sharing does not arise.
The fee architecture also constrains exit loads and prohibits upfront fees in any form, requiring all charges to be disclosed transparently in the disclosure document and the client agreement. SEBI's authority to set, and to penalise deviations from, such conduct standards is well settled; in SEBI v. Roofit Industries Ltd., (2016) 12 SCC 125, the Supreme Court emphasised that the discretion of the adjudicating officer in fixing monetary penalty is structured by the statute, underscoring that intermediary mis-charging is met with calibrated, enforceable sanction.
The disclosure document and the client agreement
Two documents anchor the manager-client relationship. Before onboarding, the manager must furnish a disclosure document containing the quantum and manner of fees, the portfolio risks, complete disclosure of any conflicts of interest, the performance of the manager, the audited financial statements for the preceding three years and the manner of investment. The disclosure document must be certified by an independent chartered accountant and filed with SEBI, and must be updated at least annually and whenever material changes occur.
The relationship is then governed by a written agreement conforming to the minimum contents prescribed in Schedule IV, which must spell out the investment objectives, the services to be provided, the areas of investment discretion, the fees and the risk factors. The agreement is the document a court will construe when a client alleges that the manager exceeded its mandate or altered terms unilaterally, and its precise drafting therefore determines the boundary of the manager's lawful discretion. The minimum-content discipline mirrors the contract-and-conduct approach SEBI takes with brokers and their authorised persons.
Two features of the agreement deserve emphasis in an answer. First, the agreement must record the specific investment approach or strategy and the areas in which the manager has discretion, because the scope of discretion conferred is the very thing a court tests when a client complains that the manager exceeded its mandate or unilaterally varied the term sheet to the client's disadvantage. Second, the agreement and disclosure document together must make full disclosure of any related-party dealings and of investment in the manager's own associates or group, since a manager deploying client funds into associated entities sits squarely in the conflict-of-interest zone the code of conduct forbids. The transparency obligations are continuing, not one-time: periodic reporting to the client, including portfolio holdings, transactions and a performance report benchmarked against an appropriate index, keeps the client informed of how the surrendered discretion is being exercised.
The code of conduct: the fiduciary spine
Schedule V prescribes the code of conduct, and it is the heart of the chapter for an answer that must demonstrate the fiduciary character of the role. The manager must act in a fiduciary capacity in relation to the client's funds; render high standards of service, exercise due diligence and ensure proper care; not make any statement or become privy to any act likely to be prejudicial to the interests of investors; and avoid conflicts of interest in managing the affairs of clients, keeping the client's interest paramount in all dealings.
The code further requires the manager to maintain confidentiality of client information, to render the disclosure document and to ensure that any recommendation is appropriate to the client. The manager must not indulge in unfair competition likely to harm investors, nor make any misrepresentation about its services or capabilities. These duties express, in regulatory form, the common-law fiduciary obligations of loyalty and care, and their breach is the typical foundation of both SEBI enforcement and civil claims by aggrieved clients.
The fiduciary framing has practical bite in three recurring fact patterns. The first is churning, where a discretionary manager generates excessive trades to inflate brokerage or to mask poor performance; this offends the duty of due care and the prohibition on acts prejudicial to investors. The second is favouritism in allocation, where scarce or profitable opportunities are allotted unevenly across clients; the code's demand that the client's interest be paramount and that clients be treated fairly is the answer. The third is self-dealing, where the manager routes client money into instruments in which it or its associates have an interest without disclosure; this is met by the conflict-avoidance and disclosure duties, reinforced by the direct-plan rule and the bar on retaining distribution commissions. An aspirant who can map each duty in Schedule V to a concrete abuse demonstrates command of why the conduct code, rather than the headline numbers alone, is the substantive heart of the chapter.
Accredited investors and large value clients
Amendments to the 2020 Regulations introduced a flexible regime for sophisticated clients. An accredited investor is one meeting prescribed thresholds of net worth or income and recognised under SEBI's accreditation framework; a large value accredited investor is an accredited investor who has entered into an agreement with the portfolio manager for a minimum investment of Rs 10 crore. For accredited investors, the Rs 50 lakh minimum-investment floor does not apply, recognising that the proxy for sophistication is redundant where sophistication is independently certified.
For large value accredited investors, the relaxations go further. Such investors may have up to 100 per cent of their assets under management invested in unlisted securities, subject to appropriate disclosure, and the quantum and manner of exit load, together with the prescribed minimum contents of the Schedule IV agreement, are governed by bilaterally negotiated contractual terms rather than by the standard regulatory template. The regime thus calibrates protection to need: maximal where the investor is a Rs 50 lakh retail-adjacent client, minimal where the investor is a Rs 10 crore accredited principal capable of bargaining for itself.
Inspection, grievance redressal and enforcement
SEBI retains continuing supervisory control. The Regulations empower SEBI to inspect the books, records and documents of a portfolio manager, to seek information, and to appoint an inspecting authority. The manager must redress investor grievances promptly and is brought within SEBI's electronic complaint-handling system. Default may attract proceedings under the Intermediaries Regulations, 2008, including suspension or cancellation of registration, as well as monetary penalty under Chapter VIA of the SEBI Act and directions under Section 11B.
The reach of SEBI's enforcement against intermediaries and those associated with the market has been confirmed at the highest level. In SEBI v. Pan Asia Advisors Ltd., (2015) 14 SCC 71, the Supreme Court upheld SEBI's jurisdiction to proceed against intermediaries whose conduct adversely affects the Indian securities market, reinforcing that a portfolio manager cannot insulate itself from accountability by structuring or locating its activities cleverly. Read with Ajay Agarwal and Roofit Industries, the position is that SEBI may keep unfit persons out, bring errant intermediaries to book, and impose calibrated penalties, the trinity of powers that gives the conduct standards in these Regulations their teeth.
Exam takeaways and likely traps
For rapid recall, fix the headline numbers: Regulations effective 16 January 2020; minimum net worth Rs 5 crore (up from Rs 2 crore); minimum client investment Rs 50 lakh (up from Rs 25 lakh); discretionary managers confined to listed securities, money-market instruments and mutual fund units; non-discretionary or advisory managers may go up to 25 per cent AUM in unlisted securities; large value accredited investor threshold Rs 10 crore with up to 100 per cent unlisted exposure; transition window 36 months; custodian mandatory for all except pure advisory managers; mutual fund investment only through direct plans; performance fees only on the high water mark basis.
The common traps are confusing the net-worth figure with the broker net-worth norms, attributing the 25 per cent unlisted cap to discretionary rather than non-discretionary managers, and forgetting that the Rs 50 lakh floor is disapplied for accredited investors. Anchor the conduct discussion in the fiduciary capacity required by Schedule V, and cite Sahara for the protective purpose, Ajay Agarwal and Pan Asia Advisors for SEBI's reach over intermediaries, and Roofit Industries for the structured penalty discretion. Cross-read with the common intermediaries framework for registration and enforcement machinery.
Frequently asked questions
What is the minimum net worth required for a portfolio manager under the 2020 Regulations?
Rs 5 crore, raised from the earlier Rs 2 crore. Net worth means paid-up capital plus free reserves less accumulated losses and unwritten-off deferred and miscellaneous expenditure, and it must be maintained continuously. Existing managers were given 36 months from the commencement of the 2020 Regulations to comply.
What is the minimum amount a portfolio manager may accept from a client?
A portfolio manager shall not accept funds or securities worth less than Rs 50 lakh from a client under Regulation 23. This doubled the earlier Rs 25 lakh floor and is designed to keep small retail investors out of individually-managed portfolios. The floor does not apply to accredited investors.
How do discretionary, non-discretionary and advisory portfolio managers differ?
A discretionary manager exercises the buy-sell discretion itself and is confined to listed securities, money-market instruments and mutual fund units. A non-discretionary manager acts on client directions, and a non-discretionary or advisory manager may invest or advise in unlisted securities up to 25 per cent of such clients' AUM. An advisory manager only advises and needs no custodian.
How are performance fees regulated?
Performance fees must be charged only on the high water mark principle, so a fee accrues only on portfolio gains above the highest value previously achieved on which a performance fee was charged. This prevents the client paying twice to recover the same loss. A contractually fixed hurdle rate may set a floor below which no profit-share arises, and upfront fees are prohibited.
Is a custodian mandatory for every portfolio manager?
Yes for all portfolio managers except those providing only advisory services, where there are no client assets in custody to safeguard. The universal custodian requirement, together with segregation of client funds and securities and the bar on pledging client securities without specific authorisation, is central to client-asset protection under the Regulations.
What relaxations apply to large value accredited investors?
A large value accredited investor is an accredited investor investing at least Rs 10 crore. For such investors the Rs 50 lakh floor is disapplied, up to 100 per cent of AUM may be invested in unlisted securities with appropriate disclosure, and exit load and the Schedule IV minimum agreement contents are governed by bilaterally negotiated terms rather than the standard regulatory template.