To bring transparency in charges of portfolio management schemes (PMS), the Securities and Exchange Board of India (Sebi) proposed that portfolio managers not earn any fee from clients till all losses were recovered if the scheme value goes down.
Sebi has invited comments from the public on these and other proposals till August 9.
In a consultative paper put out on its website on Tuesday, Sebi said the profit sharing or performance related fees would be charged on the basis of the high-water mark principle over the life of the investment. This means if the portfolio value goes down and then recovers, the manager does not earn fees till all losses have been made up.
According to Sebi, the high-water mark would be the highest value the portfolio or account had reached. Value of the portfolio for computation of the mark would be taken to be the value on the date when performance fees are charged. For the purpose of charging performance fee, the frequency would not be less than quarterly.
The portfolio manager would charge a performance-based fee only on increase in portfolio value in excess of the previously achieved high-water mark, Sebi said.
Usually, profit sharing or performance related fees in PMS are charged by portfolio managers upon exceeding a hurdle rate as specified in the agreement. Hurdle rate is the annualised rate of return below which the profit sharing is not applicable.
Sebi said the proposed measure had been formulated after it got complaints from clients relating to fees and charges levied by portfolio managers.
Sebi also proposed that all fees and charges would be charged on the actual amount of clients’ funds under management. Also, in the event of partial withdrawal of funds by investors, all fees and charges would be proportionately charged, based on the time after which withdrawal is made and the value of funds withdrawn, and the high-water mark should be accordingly adjusted.
To ensure transparency and adequate disclosure on fees and charges, the client agreement would need to contain an annexure listing all fees and charges payable to the portfolio manager. The client would be required to separately sign the annexure on fees and charges and add in his own handwriting that he had understood the charge structure.
The regulator plans to make these measures applicable for all new client agreements, with effect from the date of the proposed circular. For existing clients, revised client agreements incorporating these terms may be implemented by October 1, it said.
