NISM Series XXI-A · Chapter 8: Operational Aspects of Portfolio Managers

L1 · Foundation

Operational aspects of portfolio managers — how PMS actually runs

Who can invest in PMS and how much, what the disclosure document must say, the full onboarding journey, what happens when a portfolio manager breaks the rules, grievance handling, reports to SEBI and FIU-IND, fees, and reporting to clients.

14 min read · Worth 13% of the paper · Written from pages 106–125 of the official NISM workbook · Updated 18 September 2026

Why this chapter matters most

Chapter 7 told you what a portfolio manager is. This chapter tells you how the business runs day to day. It carries 13 marks — second only to Chapter 9 in the Series XXI-A syllabus — and as a distributor it is the one you will use every week.

Follow the life of one client, from the first meeting to the quarterly report. That is exactly the order the workbook uses.

8.1 Who can invest in PMS

The workbook lists nine types of investor. Each needs a minimum investment of ₹50 lakh.

Can invest in PMS
Individuals
Non-resident Indians (as per the RBI guidelines)
Hindu Undivided Family (HUF)
Proprietorship firms
Association of persons
Partnership firms
Limited liability partnership (LLP)
Trust
Body corporate

The workbook's sample questions test this list with "all of the above" options. If every option on the paper appears in this table, the answer is all of the above.

Chapter 7 adds two exceptions to the ₹50 lakh floor: it does not apply to an accredited investor (subject to disclosure and agreed terms), and it does not apply to the co-investment portfolio manager. Chapter 8 itself states the floor without those exceptions.

8.2 The disclosure document

Investors can only make good decisions if they get accurate and standardised disclosure. So the regulation says three things about the disclosure document:

It must be given to the prospective client along with the account opening form, before the agreement is signed, and the portfolio manager must keep an audit trail.
It must be available on the portfolio manager's website.
It must use simple language — clear, concise and easy to understand.

SEBI, in consultation with APMI, introduced a simplified disclosure document format by a SEBI circular dated 9 September 2025. It has two parts.

Part I — Static section (items 1 to 11)

No.	Heading	What goes in
1	Disclaimer clause	Prepared as per SEBI (Portfolio Managers) Regulations, 2020 and filed with SEBI; SEBI has neither approved nor disapproved it
2	Definitions	Every term defined, used uniformly
3	Description	History and business, promoters and directors, top 10 group companies by turnover, services offered (discretionary / non-discretionary / advisory)
4	Penalties and litigation	SEBI penalties and directions, economic offences, pending litigation (criminal cases shown separately), deficiencies found by regulators, enquiries
5	Services offered	Investment objectives, investment approaches, policy and maximum percentage for investing in associates or group companies
6	Risk factors	Market risk, past performance does not indicate future performance, non-diversification risk, no track record, conflicts of interest
7	Nature of expenses	Management and advisory fees, custodian fee, registrar and transfer agent fee, brokerage and transaction cost
8	Taxation	Tax implications and TDS for various investors
9	Accounting policies	How client investments are accounted for
10	Investor services	Name, address and phone of the investor relation officer; grievance and dispute mechanism
11	Diversification policy	The portfolio manager's diversification policy for client portfolios

Part II — Dynamic section (items 12 to 16)

No.	Heading	What goes in
12	Client representation	Category and number of clients, funds managed, associate/group companies and others (last 3 years), related-party transactions as per ICAI standards
13	Financial performance	Based on audited financial statements
14	Performance of portfolio manager	Last three years; discretionary managers use Time Weighted Rate of Return
15	Audit observations	Preceding 3 years
16	Investments in related parties	Client money invested in securities of related parties or associates

An easy way to remember the split: static describes who the manager is; dynamic shows numbers that change every year.

Written-down policies and the dealing team

Every portfolio manager must have a written policy covering the roles of the fund management, dealing, compliance, risk management and back-office teams — from order placement to execution to trade allocation.

A second, specific policy must cover:

When orders are placed per client and when they are pooled from the portfolio manager's trading account (specific situations, not generic)
When a deviation from the intended allotment of securities is allowed, if at all
How margins or collaterals are split among clients without hurting any client

Any deviation must be for exigency only, with prior written approval of the Principal Officer and the Compliance Officer and a detailed rationale. These policies must be approved by the Board or equivalent body.

Portfolio managers must also set up a dealing team (DT) to place and execute all orders. The DT may include the Principal Officer. The dealing room rules:

Conversations only on dedicated recorded telephone lines or authorised email ids
No mobile phones or other devices inside the dealing room
Internet restricted to trade execution
Entry only for authorised employees
No sharing of information except for trade execution

For equity, equity-related instruments and mutual fund units, a portfolio manager with AUM of ₹1,000 crore or more (discretionary plus non-discretionary) must run an automated system with minimal manual intervention for order management and allocation.

Every portfolio manager must keep an audit trail and time-stamp order placement, order execution and trade allocation.

8.3 Onboarding a client, step by step

The workbook calls onboarding and reporting the two important elements of the customer life cycle.

Read the disclosure document. Given with the account opening form, before signing. Always available on the website.
Complete KYC. Proof of identity, proof of residence, and PAN is mandatory for all PMS investors. KYC must be done by at least one entity regulated by a financial regulator — SEBI, RBI, IRDAI or PFRDA. The portfolio manager may ask for more. Documents differ for NRIs, non-individuals and minors.
Fill the application form. General information (name, addresses, photo, PAN, occupation, income, introducer), investment profile (experience, risk tolerance, horizon, objective, withdrawal choice), and the investment approach and portfolio construction chosen.
Sign the agreement. A written agreement defining mutual rights, liabilities and obligations.
Receive the MITC. The "Most Important Terms and Conditions" document, acknowledged by the client.

On inclusive digital KYC: a SEBI circular dated 23 May 2025 says digital KYC must be accessible to persons with disabilities, including those with visual impairments. Intermediaries must offer assistive digital services.

What the agreement must contain

The workbook lists fifteen items. The ones most worth remembering:

Investment objectives and services; period of contract and early termination
Investment approach, areas of investment and any client restrictions on a company or industry
Type of instruments and proportion of exposure
Terms for early withdrawal
Risks involved
Fees payable, including for outsourced activities
Custody of securities
For a discretionary manager: the client's liability shall not exceed his investment
Accounting, audit and reports

Three fee protections come with the agreement. A fee calculation tool must be given to all clients. Fee illustrations are required whenever a performance fee is charged. And no fees or charges beyond those in the agreement.

MITC deadlines

The MITC must be followed for new clients onboarded on or after 1 October 2024. Existing clients had to be informed by email or another preservable mode by 1 January 2025. APMI publishes the standard format.

Direct onboarding

Portfolio managers must offer clients a direct option — onboarding without a distributor. This option must be prominently disclosed in the disclosure document, marketing material and website. No charges except statutory charges may be levied on direct onboarding. Investors can still choose to come through a distributor.

Cash, securities or both

A client can bring cash, securities, or a mix — worth at least ₹50 lakh in total. Securities are valued on the onboarding date and must meet the regulatory criteria. The manager may then sell all or part of those securities to fit the investment approach.

Joint holders

Records are in the name of the first holder. All dividends, interest and redemption proceeds go to the first holder's account.
All joint holders must sign the application and complete PAN and KYC.
Mode of operation: single, joint, or anyone or survivor.
Changing the mode, or adding or deleting holders, needs signatures of all holders.
In a demat account, holders cannot be added or deleted once the account is opened.

8.4 When a portfolio manager defaults

A manager who breaks the SEBI Act, rules or regulations faces action under Chapter V of the SEBI (Intermediaries) Regulations, 2008:

Suspension of registration for a period
Cancellation of registration
Ban on new assignments, contracts or schemes for a period
Debarring the principal officer from any registered intermediary for a period
Debarring a branch or office for a period
Warning

8.5 Investor grievances

The manager must resolve grievances within the time stipulated by SEBI and keep SEBI informed of the number and nature of complaints. It must appoint a compliance officer to monitor grievance redressal. (Chapter 7 puts the timeline at 21 calendar days from receipt.)

The complaint ladder:

Time-bound resolution by the intermediary, the MII, and through SCORES
If not satisfied — the MII-administered dispute resolution process
If either party is unhappy with the arbitration award — the courts

Regulation 22A, inserted by the SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023 with effect from 3 July 2023, sends disputes to mediation and/or conciliation and/or arbitration.

The Online Dispute Resolution (ODR) stages:

Stage	What happens
Pre-conciliation	The MII facilitates an amicable discussion. Resolving here avoids formal proceedings
Conciliation	A neutral conciliator helps parties reach a compromise
Arbitration	One or more arbitrators give a binding and enforceable award

The first two stages are free of cost for investors. Requests go through the SMART ODR portal and are auto-assigned to an MII ODR platform on a round-robin basis.

8.6 Disclosures to regulators

To SEBI, as and when asked: particulars of portfolio management, changes that affect the registration, names of clients, and net worth particulars (regulation 9).

To FIU-IND: The Prevention of Money Laundering Act, 2002 is the anti-money-laundering framework. FIU-IND is the central national agency that receives, analyses and passes on information about suspect transactions. A portfolio manager must report a suspicious transaction within 7 working days.

8.7 Costs, expenses and fees

Fees are agreed in the client agreement, with the client's prior consent. The indicative list:

Investment management and advisory fee — fixed, return-based, or both
Custodian / depository fee — demat account, custody and transfer charges
Registrar and transfer agent fee
Brokerage and transaction costs — including STT and stamp duty; brokerage charged at actuals
Certification, fund accounting and professional fees — audit, tax, legal, notarisation, courier
Out-of-pocket and incidental expenses — statutory levies, telephone, opening accounts

The four regulatory limits:

No upfront fees, directly or indirectly
Brokerage at actuals
Operating expenses (excluding brokerage) above the PMS fee: maximum 0.50% per annum of average daily AUM
Exit load: 3% in year 1, 2% in year 2, 1% in year 3, nil after three years (all maximums, on the amount redeemed)

High water mark — a performance fee is charged only on gains above the portfolio's previous highest value. Workbook example: ₹1 crore grows to ₹1.2 crore (fee charged), falls to ₹1 crore (no fee), rises to ₹1.3 crore (fee only on the gain above ₹1.2 crore).

Hurdle rate — the minimum return before any performance fee. Workbook example: hurdle 10%; year 1 return 8% means no fee; year 2 return 15% means fee only on the 5% excess.

8.8 Reporting to the client

The manager must send a report as agreed in the contract, but at least every three months (the period cannot exceed three months), and whenever the client asks. It must show:

(a) composition and value of the portfolio, cash balance, aggregate value
(b) transactions during the period
(c) interest, dividend, bonus, rights received
(d) expenses incurred
(e) risks foreseen
(f) defaults in coupon payments and downgrades to default rating
(g) commission paid to distributors for that client

Two return measures, two uses. When advertising an investment approach, show its TWRR with the trailing return of the benchmark. When reporting to an investor, show that investor's XIRR — plus the minimum, maximum and median XIRR across all investors in that approach, and the approach's TWRR and benchmark separately. A disclaimer must explain that returns differ because of timing of flows and portfolio composition differences.

Beyond the book

APMI, the Association of Portfolio Managers in India, publishes performance figures for PMS investment approaches on its website. When you compare two PMS products using such tables, you are looking at TWRR figures for the approach — not what any single investor earned. That is exactly why the reporting rules make the manager show each investor their own XIRR as well.

Think of it like this

The disclosure document is the menu card with the kitchen's inspection report stapled on

Before you order at a restaurant, you see the menu and prices. Imagine the law also forced the restaurant to staple on its last three health inspections, any fines, and a line saying "yesterday's tasty biryani does not promise today's".

That is the PMS disclosure document. The static part is the menu that rarely changes — who runs the place, what they serve, what they charge. The dynamic part is the inspection record — last three years of performance, audit observations, client numbers. And it must be handed to you before you sit down and order, not after the bill arrives.

High water mark is the flood line on a village wall

After a big flood, villagers paint a line on the wall showing the highest the water reached. The next monsoon only counts as a "record" if the water crosses that line.

A PMS performance fee works the same way. If your portfolio hit ₹1.2 crore, then fell to ₹1 crore, climbing back to ₹1.2 crore is not new profit — it is just recovering lost ground. The manager earns a performance fee only on water above the old line. That stops a manager being paid twice for the same gains.

The dealing room is an exam hall

In an exam hall, phones are collected at the door, only registered candidates enter, and you cannot talk to anyone. Nobody assumes every candidate is a cheat — the rules just make cheating impossible.

The PMS dealing room works the same way. No mobile phones, recorded lines only, authorised staff only, internet only for trade execution. With client orders worth crores passing through, the room is sealed so that no information leaks out and no one can trade ahead of clients.

The complaint ladder is like a cricket DRS review

A batsman given out first asks the on-field umpire to reconsider. If still unhappy, he goes to the third umpire. Only the third umpire's decision is final on the field.

Investor complaints climb the same way. First the intermediary / MII / SCORES. If unsatisfied, the MII-administered ODR — pre-conciliation, then conciliation (both free for investors), then arbitration whose award is binding. And like a player who can still approach the ICC, a party unhappy with the arbitration award can go to the courts.

Key terms in this chapter

APMI: Association of Portfolio Managers in India — the industry body SEBI consulted on the simplified disclosure document, and which published the standard MITC format.
Arbitration: The ODR stage where one or more neutral arbitrators give a binding and enforceable award. A dissatisfied party may still approach the courts.
Audit trail: A time-stamped record of every step — order placement, execution and allocation — so that any action can be traced later.
Conciliation: A formal ODR stage where a neutral conciliator helps the parties reach a mutually acceptable compromise. Free for investors.
Dealing team (DT): The team a portfolio manager must constitute to place and execute all orders under its written policies, working from a restricted dealing room.
Direct onboarding: Joining a PMS without a distributor. Portfolio managers must offer it and may levy only statutory charges.
Disclosure document: The document a portfolio manager must give every prospective client, with the account opening form and before the agreement is signed, describing the manager, services, risks, fees and performance. Also on the website.
Dynamic section: Part II of the simplified disclosure document (items 12–16): client representation, financial performance, portfolio manager performance, audit observations and related-party investments.
Exit load: A charge on redemption. For PMS the maximum is 3% in year 1, 2% in year 2, 1% in year 3 and nil after three years, on the amount redeemed.
First holder: In a joint PMS investment, the holder in whose name records are created and to whose account all dividends, interest and redemption proceeds are paid.
FIU-IND: Financial Intelligence Unit – India — the central national agency that receives, analyses and disseminates information on suspect financial transactions.
High water mark: The portfolio's previous highest value. A performance fee is charged only on gains above it, so the manager is never paid twice for the same gains.
Hurdle rate: The minimum return a portfolio must earn before a performance fee is charged; the fee then applies only to the return above it.
Investment approach: A broad outlay of the type of securities and permissible instruments the portfolio manager will invest in for a client, considering factors specific to clients and securities.
KYC: Know Your Customer — verifying proof of identity, proof of residence and PAN before a client can invest.
MITC: Most Important Terms and Conditions — a short document on the critical parts of the manager–client relationship, which the client must acknowledge.
Online Dispute Resolution (ODR): The MII-administered process of pre-conciliation, conciliation and arbitration for investor disputes, accessed through the SMART ODR portal.
Operating expenses cap: Operating expenses excluding brokerage, above the PMS fee, may not exceed 0.50% per annum of the client's average daily AUM.
PMLA 2002: The Prevention of Money Laundering Act, 2002 — the law under which intermediaries must follow anti-money-laundering and KYC norms.
SCORES: SEBI's existing online complaint system — part of the first, time-bound tier of grievance resolution.
Static section: Part I of the simplified disclosure document (items 1–11): disclaimer, definitions, description, penalties, services, risk factors, expenses, taxation, accounting policies, investor services and diversification policy.
TWRR: Time Weighted Rate of Return — used to present the performance of an investment approach, with the benchmark's trailing return, when advertising or publishing.
Upfront fee: A fee charged at the time of investing. Portfolio managers may not charge one, directly or indirectly.
XIRR: Extended Internal Rate of Return — used to report an individual investor's own return, reflecting the timing of that investor's inflows and outflows.

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Original explanatory writing based on the official NISM workbook for Series XXI-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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