Segregation of holdings

A portfolio manager runs money for many clients at once. Every one of those clients owns actual securities, not units in a pool.

So whose shares are whose has to be visible at all times. That is what segregation of holdings means.

The rule has two halves. Each client's securities sit in a separate account for that client. And all clients' money sits in a separate bank account, kept with a Scheduled Commercial Bank.

Notice the asymmetry. Securities are separated client by client. Cash is separated from the manager's own money, but pooled across clients in one account.

Why it matters is simple. If the manager gets into trouble, a client's shares are identifiably that client's. They were never mixed with anyone else's, and never mixed with the firm's.

This is also what makes a portfolio management account different from a mutual fund. A fund investor owns units. A portfolio management client owns the securities themselves, in an account with his own name on it.

The two obligations (section 12.5, Responsibilities of a Portfolio Manager, under the SEBI PMS Regulations).

• The portfolio manager shall segregate each client's holding in securities in separate accounts.
• The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank.

The company they keep. The workbook lists both inside the same set of responsibilities, and the neighbours explain why segregation is there:

Segregation is the mechanical guarantee behind two of those. A manager who cannot commingle holdings finds it far harder to derive an indirect benefit from them, or to use one client's securities as collateral for another's position.

Discretionary and non-discretionary alike. The same section requires the discretionary manager to manage each client's funds individually and independently, in a manner which does not partake the character of a Mutual Fund, while the non-discretionary manager manages funds according to the client's directions. Segregation of holdings is the account structure that makes the discretionary undertaking auditable — individual management is only a claim unless the accounts are actually individual.

Scope of the figure. The segregation requirement itself carries no number in this workbook — no account limit, no reporting frequency, no deadline. The Rs 50 lakh and the 30% above belong to the neighbouring responsibilities in the same list, and are cited here as the context in which segregation applies, not as thresholds for segregation.

Konkan Capital is a SEBI-registered portfolio manager with three clients.

Each of the three is above the Rs 50 lakh floor, so each may be accepted at all. Every share bought for Mr Shenoy sits in his account, tagged to him, never in a house account and never alongside Mrs Kamath's.

The Rs 8,30,00,000 of cash awaiting deployment, however, sits in one bank account at a Scheduled Commercial Bank — separate from Konkan Capital's own money, but shared between the three clients. That is what the rule requires: separate securities accounts, one separate client funds account.

Now the failure the rule prevents. Suppose Konkan Capital wants to buy a block of 50,000 shares and finds it convenient to book the whole lot into a single house account, allocating to clients later. If the price moves during the day, the manager decides after the fact who got the good fill. Segregation makes that impossible, because the shares had to land in a named client's account in the first place.

And the associate limit, which segregation makes checkable. Konkan Capital's parent group runs a listed NBFC. For Mrs Kamath it may hold at most 30% of Rs 1,50,00,000 = Rs 45,00,000 in group securities, and only with her one-time written consent. Because her holdings are in her own account, that 30% can be computed for her alone. In a commingled pool the number would be a group average, and a single client could quietly be carrying far more.

Chapter 12 (Portfolio Manager), section 12.5 (Responsibilities of a Portfolio Manager), which lists the SEBI-mandated obligations in a single run. Expect a direct recall question — where must a portfolio manager keep clients' funds, and the answer is a separate account with a Scheduled Commercial Bank — and a question asking whether client securities are held jointly or separately, where the answer is separate accounts per client. The neighbouring Rs 50 lakh minimum and 30% associate cap are examined from the same section.

• Securities are segregated per client; funds are pooled in one separate client account. Getting this the wrong way round is the commonest error, because the word separate appears in both limbs.
• The funds account must be with a Scheduled Commercial Bank. Not any bank, and not a co-operative bank.
• This is not client level segregation. That rule keeps advisory and distribution services apart for the same client. This one keeps clients' holdings apart from each other.
• It is not a segregated portfolio either. Side-pocketing after a credit event is a mutual fund mechanism, not a PMS account structure.
• A portfolio management client owns the securities, not units. Segregation is why that statement is operationally true.
• The discretionary manager must manage each client individually and independently, in a manner that does not partake the character of a mutual fund. Segregated accounts are how that is demonstrated.
• The Rs 50 lakh and the 30% are separate responsibilities in the same list. They are not thresholds for segregation, and the segregation rule itself carries no figure.