Firm-level performance audit

A portfolio manager can report the performance of one good client's account, or of a handpicked few, and let that stand in for the whole firm's skill. SEBI closes that gap with a firm-level performance audit: a check that looks at everything the manager runs, not a curated sample.

The requirement has two linked parts. First, when the manager reports its own aggregate, firm-wide performance in any document, that number has to genuinely be the combined performance of every portfolio it manages — nothing excluded to flatter the figure. Second, an independent audit of that firm-level data is required, covering all clients' portfolios, both discretionary and non-discretionary.

Chapter 7, section 7.6.7, states that a Portfolio Manager is required to consider all clients' portfolios managed — discretionary and non-discretionary — for the audit of firm-level performance, with the terms of reference for that audit specified in consultation with the Association of Portfolio Managers of India (APMI). Portfolio managers must then submit confirmation of this compliance to SEBI within the stipulated time period.

Chapter 20, in the performance-reporting compliance clarifications, states the matching rule directly: portfolio managers must ensure that the aggregate performance of the Portfolio Manager (firm-level performance) reported in any document shall be the same as the combined performance of all the portfolios managed by the Portfolio Manager. The same set of clarifications also requires performance to be reported net of all fees and expenses (including taxes), requires all cash holdings and liquid-fund investments to be counted in the calculation (see cash drag), and requires marketing material and website performance figures to match exactly what is reported to SEBI.

Illustrative figures. Meridian Portfolio Managers Pvt Ltd runs 60 client accounts: 45 discretionary, totalling Rs 180 crore, and 15 non-discretionary, totalling Rs 40 crore.

Its marketing brochure advertises a firm-level return of 18% for the year — but that figure was calculated using only the 45 discretionary accounts, which happened to outperform the 15 non-discretionary ones (which returned an average of 9% for the year). The true combined, asset-weighted firm-level return, across all Rs 220 crore under management, works out closer to 16.4% once the non-discretionary accounts are folded in.

Under the firm-level performance audit requirement, the independent auditor — working to terms of reference agreed with APMI — would flag the marketing figure as non-compliant: it excludes 15 of the firm's 60 client portfolios and overstates the number a prospective client would actually be entitled to expect from the firm as a whole. Meridian would have to restate the advertised figure to the full Rs 220 crore combined number, or drop the firm-level claim entirely.

Chapter 7 (Role of Portfolio Managers), section 7.6.7, sets out the audit obligation and the APMI-agreed terms of reference; Chapter 20 (Performance Measurement and Evaluation), in its list of SEBI performance-reporting clarifications, states the matching rule between advertised firm-level performance and actual combined portfolio performance. Expect a question on which portfolios must be included in a firm-level figure (all of them, discretionary and non-discretionary), and one on who sets the audit's terms of reference.

• "Firm-level" means every client portfolio, discretionary and non-discretionary together — excluding a category of accounts to improve the reported number is exactly what this requirement is designed to catch.
• The audit's terms of reference are set in consultation with APMI, not unilaterally by SEBI or by the portfolio manager alone.
• This is distinct from the annual audit of a client's own portfolio accounts by an independent chartered accountant, which is a separate, per-client obligation covered earlier in Chapter 7 — firm-level performance audit is about the aggregate figure across all clients.
• Marketing material, the firm's website and the figures reported to SEBI must all match exactly — a discrepancy between any two of the three is itself a compliance failure, independent of whether the underlying number is accurate.
• Confirmation of compliance with the firm-level audit requirement must be submitted to SEBI within the stipulated time period — a deadline the workbook references but does not itself number, so do not invent a figure for it.