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SEBI’s view on discretionary portfolio managers employing economies of scale

Finsec Law Advisors

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In response to queries raised by Karvy Stock Broking Limited pertaining to pooling of funds by a discretionary portfolio manager for achieving economies of scale, SEBI has recently issued an interpretative letter under the SEBI (Informal Guidance) Scheme, 2003, clarifying the position further. Karvy submitted to SEBI that they had opened separate bank accounts exclusively for pooling client funds. Corporate benefits were also received in such accounts and distributed to clients on an equal basis. Further, they submitted that detailed back office records were maintained and the funds of each client were reconciled on a daily basis. In relation to securities, separate demat accounts were opened in the name of the clients for transferring the allocated securities to them. In this light, Karvy sought clarity on whether the pooled bank account may be specified as the bank account in the demat account opening form and other demat records.

SEBI considered various provisions applicable to pooled bank accounts. Regulation 16 of the SEBI (Portfolio Managers) Regulations, 1993, imposes restrictions on the manner in which a portfolio manager manages client funds and securities. Although portfolio managers are obligated to ensure segregation of each client’s funds, they may aggregate buy or sell transactions for achieving economies of scale. If aggregated, portfolio managers must undertake allocation on an equal basis and at the weighted average price of the day’s transactions. Further, SEBI’s circular dated June 23, 2009, which provides guidelines on maintenance of pooled accounts on behalf of clients, mandates client wise segregation of funds through maintenance of clear back office records, daily reconciliation of client wise funds and prohibits usage of one client’s funds for another.

Considering the factual scenario and the regulatory provisions specified above, SEBI was of the view that portfolio managers are permitted to maintain funds of all clients in a separate bank account and capture details of such account in demat account of their Indian resident clients, subject to compliance with Regulation 16 of the PM Regulations and the 2009 circular.