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

L1 · Foundation

Operational Aspects of Portfolio Managers — how a PMS actually runs

Who can invest in a PMS, what the disclosure document must say, how a client is onboarded, what goes into the agreement, what happens when a portfolio manager defaults, how complaints are resolved, and every fee a client can be charged.

15 min read · Worth 7% of the paper · Written from pages 138–161 of the official NISM workbook · Updated 18 September 2026

What this chapter is about

Chapter 7 told you what a portfolio manager is. This chapter is about the plumbing: who is allowed in, what paperwork happens, what the client must be told, and what the client can be charged.

It is a rules-heavy chapter. Most questions here are straight recall of a figure or a list. Learn the lists.

8.1 Who can invest in a PMS

The workbook names nine kinds of investor. Each needs a minimum investment of Rs. 50 lakh.

Can invest in PMS
Individuals	Hindu Undivided Family (HUF)
Non-resident Indians (as per RBI guidelines)	Proprietorship firms
Association of Persons	Partnership firms
Limited Liability Partnership	Trust
Body Corporate

The workbook's own sample question asks which of proprietorship firms, AOPs and partnership firms is not eligible. The answer is none of them — all three are on the list.

8.2 The disclosure document

A client cannot judge a PMS without facts. So SEBI makes the portfolio manager hand over a disclosure document.

When must it be given? Here the rule changed, and the exam likes the change.

Before 2020: the disclosure document had to reach the prospective client with the account opening form at least two days in advance of signing the agreement.
Under the SEBI (Portfolio Managers) Regulations, 2020: it is given with the account opening form prior to signing the agreement — at any time before or at the time of entering into the agreement, in hard or soft copy. It must also be available at all times on the portfolio manager's website.

Why the change? A working group found that keeping an audit trail proving every client got the document two days early was onerous and left gaps. So the two-day rule was dropped.

The document must be written in simple language, clear, concise and easy to understand.

SEBI, in consultation with APMI, introduced a simplified disclosure document format by circular dated September 09, 2025. It has two parts.

Part I — Static section (items 1 to 11)

No.	Heading	What goes in
1	Disclaimer clause	Prepared under the PM Regulations 2020 and filed with SEBI; not approved or disapproved by SEBI, and SEBI has not certified its accuracy
2	Definitions	All terms defined; language as in the Regulations
3	Description	History and business; promoters and directors; top 10 group companies by turnover; services offered — discretionary, non-discretionary, advisory
4	Penalties, pending litigation	SEBI penalties and directions; economic-offence fines; pending material litigation (criminal cases shown separately); deficiencies SEBI observed; enquiries and adjudication
5	Services offered	Investment objectives and policies; investment approaches; policy on investing in associates and group companies, with the maximum percentage
6	Risk factors	Market risk with no guarantee; past performance not indicative; risk of non-diversification; no track record, if so; conflicting employee trades; group-company conflicts
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
9	Accounting policies	How client portfolios are accounted for
10	Investor services	Investor relation officer's name, address, phone; grievance redressal and dispute settlement
11	Diversification policy	The PM'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 (last 3 years), related-party transactions as per ICAI standards
13	Financial performance	Of the portfolio manager itself, from audited statements
14	Performance of portfolio manager	Last three years; for discretionary PMs, calculated by the Time Weighted Rate of Return method
15	Audit observations	Of the preceding 3 years
16	Investments in related parties	Client funds invested in securities of the PM's related parties or associates

A useful way to remember the split: static describes who the manager is and how it works. Dynamic holds the numbers that change every year.

8.2.1 Written-down policies and the dealing room

A portfolio manager must have a written policy setting out roles of the teams for fund management, dealing, compliance, risk management and back office — covering order placement, execution and trade allocation among clients.

A second, specific policy must cover:

Specific (not generic) situations in which orders are placed for each client individually, or pooled from the PM's trading account
When deviation from the intended allotment of securities is permissible, if at all
How margins or collateral are placed across clients without hurting any client
Deviations only in exigency, 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.

To treat all clients fairly and equitably, the PM must set up a Dealing Team (DT) for order placement and execution. The DT may include the Principal Officer. The dealing room rules are strict:

Conversations only on dedicated recorded telephone lines or from 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 PM with AUM of INR 1,000 crore or more (discretionary plus non-discretionary) must have an automated system with minimal manual intervention for order management and allocation.

Every PM must keep an audit trail and time stamps for order placement, execution and allocation.

8.2.2 GIPS — the global best practice

The Global Investment Performance Standards (GIPS) are ethical standards for calculating and presenting investment performance, built on fair representation and full disclosure. GIPS is a registered trademark of the CFA Institute.

The central idea is the composite — an aggregation of one or more portfolios managed to a similar mandate, objective or strategy. Some of the disclosures GIPS demands:

The composite description, including material risks, and use of leverage, derivatives, short positions and illiquid investments if material
The benchmark description — or, if no appropriate benchmark exists, why none is shown
For a custom benchmark: components, weights, rebalancing, methodology, and a clear "custom" label
For gross-of-fees returns: whether any fees other than transaction costs are deducted
For net-of-fees returns: whether performance fees or carried interest are deducted, and whether model or actual fees are used
The reporting currency; the measure of internal dispersion; the current fee schedule
The composite inception date and creation date
That valuation and performance policies are available on request
For extra risk measures: what they are, and the name of the risk-free rate used

8.3 Onboarding a client

The workbook calls client onboarding and reporting the two important elements of the customer life cycle. Onboarding has these steps.

1. Reading the disclosure document — as above, before or at signing.

2. KYC. Required of all PMS investors under the Prevention of Money Laundering Act, 2002 (PMLA), so that illegal funds are not routed into Indian markets.

Proof of identity with a photograph — passport, driving licence, voter ID, Aadhaar and the like
Proof of address — passport, ration card, voter ID, latest utility bills
PAN verification
In-person verification (IPV) by an authorised official of the intermediary

To stop investors repeating KYC with every intermediary, SEBI mandated uniform KYC from January 1, 2012, run through KYC Registration Agencies (KRAs). The KYC form has two parts: Part I is identity and address, common to all; Part II is whatever extra each intermediary needs.

Then came the Central KYC Records Registry (CKYCR), following a 2015 amendment to the PML (Maintenance of Records) Rules, 2005, using a template finalised by CERSAI. Intermediaries upload KYC data for all individual accounts opened on or after August 1, 2016.

Once a client gives a KYC identifier, the intermediary downloads the records and cannot ask for documents again, unless the information has changed, the current address needs verifying, or it needs enhanced due diligence or a better risk profile.

SEBI's circular of May 23, 2025 requires inclusive digital KYC for persons with disabilities, including the visually impaired. Intermediaries must offer assistive digital services.

KYC for NRIs adds: certified copy of passport, certified overseas address, permanent address, certified PIO card (for PIOs), and for Merchant Navy NRIs a Mariner's declaration or certified copy of the Continuous Discharge Certificate (CDC). Documents must be in English, attested by the Consulate or an overseas branch of an Indian scheduled commercial bank.

FATCA and CRS. CBDT Rules 114F to 114H require extra tax and beneficial-owner information. From 2015, Indian financial institutions must report FATCA/CRS reportable accounts and collect a self-declaration from all investors, existing and new. Non-individuals must also give Ultimate Beneficial Owner (UBO) details.

NRI demat accounts. NRIs can open one with any DP. They mark type (NRI) and sub-type (repatriable or non-repatriable). No RBI permission is needed to open it. They need separate demat accounts for repatriable and non-repatriable holdings. Joint accounts are allowed, and ownership follows the first holder — so proceeds can be repatriated if the first holder may repatriate, even when the other holders live in India.

NRI trading accounts. Two trading accounts are possible, linked to NRE and NRO bank accounts. NRIs cannot buy shares on the breach list (where the foreign investment limit is reached). Funds must be clear before buying, securities available before selling, cash-segment trades are delivery only, and original contract notes go to the branch holding the Portfolio Investment Scheme (PIS) account.

3. The application (account opening) form. Under the 2020 Regulations it covers:

General information — name, addresses, PAN, occupation, introducer, and annual income for the last 3 financial years with net worth (optional)
Investment profile — experience, share of total portfolio placed with the PM (optional), goals, risk tolerance (low, medium or high), time period (must equal the term of the agreement), systematic withdrawal provisions
Investment approach chosen
Portfolio construction — equity, balanced, debt, mutual funds, others

8.3.1 The agreement

Before managing a client's money, the PM signs a written agreement setting out mutual rights, liabilities and obligations. The client must also separately confirm — in their own handwriting (physical) or by typing it (digital) — that they have understood the fee structure.

The agreement includes fifteen items. The ones questions reach for:

Investment objectives and services
Period of the contract and early termination
Investment approach, areas of investment, and client-imposed restrictions on a company or industry
Type of instruments and proportion of exposure
Terms for early withdrawal
Attendant risks
Fees — and the quantum and manner of fees for every activity, including outsourced ones
Custody of securities
For a discretionary PM: the client's liability shall not exceed his investment with the PM
Accounting, audit and reporting to clients

An investment approach is a broad outlay of the securities and permissible instruments the PM will use, considering factors specific to the client and the securities.

Three more requirements sit alongside the agreement. A fee calculation tool must be given to all clients. Fee illustrations must be given whenever performance fees are charged. No fees beyond those in the agreement. And the PM must give a Most Important Terms and Conditions (MITC) document in the standard format.

8.4 Direct onboarding

A PM must offer clients the option to be onboarded directly, without a distributor. It must disclose this option prominently in the disclosure document, marketing material and website.

At direct onboarding, no charges except statutory charges may be levied. This direct-onboarding provision does not apply to co-investment PMS. Investors can still choose to come through distributors.

Process flow. Clients invest in cash, securities or both, worth at least Rs. 50 lakh. The PM shall not accept funds or securities worth less than that. Securities are valued on the onboarding date. The PM may sell all or part of those securities to fit the investment approach.

Joint holding. Allowed. Records are in the first holder's name and all benefits — dividends, interest, redemptions — go to the first holder's account. All joint holders sign and complete PAN and KYC. Operating modes: single, joint, or anyone or survivor. Any change of mode, or adding or removing a holder, needs all holders' signatures. But in a demat account, holders cannot be added or deleted once it is opened.

8.5 Liability on default

A PM who breaks the SEBI Act, rules or regulations is liable to action under Chapter V of the SEBI (Intermediaries) Regulations, 2008. The six actions:

Suspension of the certificate of registration for a specified period
Cancellation of the certificate
Prohibiting new assignments or new schemes for a period
Debarring the Principal Officer from any registered intermediary for a period
Debarring a branch or office for a period
Warning

8.6 Grievances and dispute resolution

The PM must redress grievances within the time SEBI stipulates and keep SEBI informed about complaints. This is a condition of registration. The PM appoints a Compliance Officer to monitor grievance redressal.

The framework now runs in three layers:

Time-bound resolution by the intermediary, the MII, and through SCORES
If unsatisfied, the MII-administered dispute resolution process
If either side is unhappy with the arbitration award, the courts

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

The Online Dispute Resolution (ODR) process has three stages:

Stage	What happens	Cost to investor
Pre-conciliation	MII facilitates an amicable discussion; formal proceedings avoided	Free
Conciliation	A neutral conciliator helps reach a mutually acceptable agreement	Free
Arbitration	Arbitrators give a binding, enforceable award	Not free

The SMART ODR portal lets an investor approach any MII. Requests are auto-assigned by round-robin. Intermediaries must show the portal link on their website and amend their agreements.

8.7 Disclosures to regulators

To SEBI, on request: particulars of portfolio management; changes in information bearing on registration; names of clients whose portfolios it managed; particulars on net worth under Regulation 9.

To FIU-IND. PMLA 2002 and its Rules came into effect on July 1, 2005. SEBI requires every intermediary to have an AML policy and follow KYC. SEBI's master circular on AML/CFT is dated December 31, 2010. The Financial Intelligence Unit – India (FIU-IND) is the central national agency that receives, analyses and disseminates information on suspect financial transactions. A PM must report any suspicious transaction within 7 working days to FIU.

8.8 Costs, fees and expenses

The fee is agreed with the client and written into the agreement. The indicative list:

Investment management and advisory fee — fixed, return-based, or a combination
Custodian / depository fee — demat opening and operation, custody, transfer
Registrar and transfer agent fee — transfer of securities, stamp charges, affidavits, notary, courier
Brokerage and transaction costs — part of acquisition cost or sale realisation; charged at actuals
Certification, fund accounting and professional fees — outsourced accounting, tax, audit, legal
Out-of-pocket and incidental expenses — courier, stamp duty, franking, statutory levies, postage, opening accounts

Regulation 22 requires the quantum and manner of every fee to be in the agreement, with the client's prior permission.

The SEBI circular of February 13, 2020 mandated four things:

Rule	What it says
No upfront fees	Not directly, not indirectly — Regulation 22(11)
Brokerage	At actuals, charged as expense
Operating expenses cap	Excluding brokerage, over and above PMS fees: maximum 0.50% p.a. of the client's average daily AUM
Exit load	Year 1: max 3%; Year 2: max 2%; Year 3: max 1%; after 3 years: nil — each on the amount redeemed

8.8.1 High water mark

The high water mark is the highest value the portfolio has reached. Performance fees are charged only on the increase above the previous high water mark.

The workbook's example: ₹1,00,00,000 rises to ₹1,20,00,000 — fee on ₹20,00,000. Next year it drops to ₹1,10,00,000 — no fee. Year three it reaches ₹1,30,00,000 — fee on only ₹10,00,000, the amount above the old peak of ₹1,20,00,000. Not on the ₹20,00,000 climb from ₹1,10,00,000.

8.8.2 Hurdle rate

Performance fees are usually charged only after the portfolio exceeds a hurdle rate or benchmark set in the agreement. Both tests work together: beat the old peak, and beat the hurdle. The L2 lesson works through the full calculation.

Think of it like this

The high water mark is a flood line on a wall

In an old Kolkata house, you can see a mark on the wall where water reached in a bad monsoon. Next year the water rises again, but only reaches halfway up. Nobody paints a new line — the old one still stands.

A portfolio's high water mark works the same way. The portfolio manager earns a performance fee only when the water crosses the old line. If the portfolio falls and then climbs back to where it was, the manager has only recovered lost ground. The client is not paying twice for the same rupees of gain.

The dealing room is an exam hall

In a board exam hall in Pune, phones are collected at the door, invigilators watch who enters, and nobody may talk except through the official channel.

A PMS dealing room runs on the same logic. No mobile phones, only recorded telephone lines and authorised email IDs, internet only for trade execution, and entry only for authorised staff. The reason is identical too: when many clients' orders pass through one desk, the rules must make it impossible to leak information or quietly favour one client over another.

Uniform KYC is an Aadhaar-linked gas connection

Moving from Lucknow to Bengaluru used to mean submitting the same identity papers to the gas agency, the bank and the phone company, one after another.

Uniform KYC ended that for markets. Complete KYC once with any specified intermediary, and the KYC Registration Agency lets the next one — a portfolio manager, a DP, a mutual fund — rely on it. With CKYCR, you just give your KYC identifier and the intermediary downloads your records. It may ask again only if something changed, your address needs checking, or it needs deeper due diligence.

Exit load is a tapering cancellation charge

Book a wedding hall in Chennai a year ahead and cancel next week — you lose a big chunk. Cancel closer to the date after paying instalments over years, and the charge shrinks.

PMS exit loads follow the same idea of a penalty that fades the longer you have been committed: 3% of the amount redeemed in year one, 2% in year two, 1% in year three, and nothing after three years. The longer you stay, the cheaper it is to leave — until leaving costs nothing.

Key terms in this chapter

Average daily AUM: The base on which the 0.50% p.a. cap on operating expenses (excluding brokerage) is measured.
Breach list: The list of companies where foreign investment has reached its permissible limit. NRIs cannot trade in these securities.
CKYCR: Central KYC Records Registry. Intermediaries upload KYC data for individual accounts opened on or after August 1, 2016, using the CERSAI template.
Composite: Under GIPS, a group of one or more portfolios managed to a similar mandate, objective or strategy, whose performance is presented together.
Dealing Team (DT): The team a portfolio manager must set up to place and execute all orders under its approved policies, working only through recorded lines and authorised email IDs.
Direct onboarding: Joining a PMS without a distributor. Only statutory charges may be levied. Not applicable to co-investment PMS.
Disclosure document: The document a portfolio manager must give a prospective client before or at signing, and keep on its website, describing the manager, its services, risks, fees and performance.
Dynamic section: Part II of the disclosure document (items 12–16): client representation, financial performance, portfolio performance, audit observations and related-party investments.
Exit load (PMS): A charge on the amount redeemed: maximum 3% in year one, 2% in year two, 1% in year three, and nil after three years.
FATCA / CRS self-declaration: Tax-residency and beneficial-owner information Indian financial institutions must collect from all investors, existing and new, under Income-tax Rules 114F to 114H.
FIU-IND: Financial Intelligence Unit – India, the central national agency that receives, analyses and disseminates information on suspect financial transactions. PMs report suspicious transactions to it within 7 working days.
GIPS: Global Investment Performance Standards — ethical standards, owned by CFA Institute, for calculating and presenting investment performance based on fair representation and full disclosure.
High water mark: The highest value a portfolio has reached. Performance fees are charged only on value added above it.
Hurdle rate: The minimum return, set in the agreement, that a portfolio must exceed before any performance fee is charged.
In-person verification (IPV): Verification of an applicant carried out in person by an authorised official of the intermediary as part of KYC.
Investment approach: A broad outlay of the type of securities and permissible instruments a portfolio manager will invest in for a client, taking into account factors specific to the client and the securities.
KYC Registration Agency (KRA): The system SEBI introduced so that KYC done with one intermediary can be used by others under uniform KYC from January 1, 2012.
MITC: Most Important Terms and Conditions — a standard-format document the portfolio manager must give clients.
Online Dispute Resolution (ODR): The MII-run process of pre-conciliation, conciliation and arbitration for investor disputes; the first two stages are free for investors.
SMART ODR portal: The online platform through which investors approach an MII for dispute resolution; requests are auto-assigned by round-robin.
Static section: Part I of the disclosure document (items 1–11): disclaimer, definitions, description, penalties, services, risk factors, expenses, taxation, accounting, investor services and diversification policy.
Upfront fee: A fee charged at entry. Portfolio managers may not charge any, directly or indirectly, under Regulation 22(11).

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

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