A non-discretionary investment management agreement is a contract between an investor and a portfolio manager in India. Unlike discretionary services where the manager makes investment decisions on their own, in a non-discretionary setup, the manager gives advice and follows the investor’s instructions. This means you, the investor, have full control over what investments are made while still benefiting from professional guidance.
These agreements are regulated by the SEBI (Portfolio Managers) Regulations, 2020, which were updated on February 7, 2023. These rules ensure that portfolio managers act in the best interest of their clients, maintain transparency, and follow strict guidelines to protect investors.
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Key Rules and Regulations
The SEBI (Portfolio Managers) Regulations, 2020, replaced older rules from 1993 to improve investor protection and make the system clearer. These rules work alongside other laws, such as the Securities Contracts (Regulation) Act, 1956, and the SEBI (Investment Advisers) Regulations, 2013. Here’s what you need to know:
Registration: Portfolio managers must register with SEBI and get a unique registration number (e.g., INP000002585 for Barclays Securities India). This ensures they follow SEBI’s standards.
Client Control: In non-discretionary services, the portfolio manager must follow the client’s directions for all investment decisions.
Other Laws: Managers must also follow local laws, SEBI circulars, and Reserve Bank of India (RBI) guidelines, especially for Non-Resident Indians (NRIs).
What Does a Non-Discretionary Portfolio Manager Do?
A non-discretionary portfolio manager, as defined by SEBI under Regulation 2(1)(g), manages your money based on your instructions. They provide advice, manage investments, and may handle the safekeeping (custody) of your securities (like stocks or bonds). They act as a fiduciary, meaning they must always put your interests first, as outlined in SEBI’s Code of Conduct (Schedule III).
This type of service is great for investors who want to stay involved in their investment decisions but still want expert advice. For example, companies like Elite Wealth say non-discretionary portfolio management services (PMS) are ideal for people who want to make the final call on their investments.
Minimum Investment and Financial Requirements
To use a non-discretionary portfolio management service, you need to invest at least INR 50 lakhs (about $60,000, depending on exchange rates). This rule, set under Regulation 23(2), applies to new clients or additional investments by existing clients. If you had investments before January 21, 2020, those are allowed to continue under older rules until they mature or as per SEBI’s instructions. You can withdraw money from your portfolio, but the remaining value must still be at least INR 50 lakhs.
Portfolio managers also have financial requirements:
They must have a net worth of at least INR 5 crores. Existing managers were given 36 months from 2020 to meet this requirement.
Fees for managers include:
A non-refundable application fee of INR 1 lakh to apply for SEBI registration.
A registration fee of INR 10 lakhs to become a portfolio manager.
A renewal fee of INR 5 lakhs every three years.
What Investments Are Allowed and What’s Not Allowed?
SEBI sets rules on what a non-discretionary portfolio manager can invest in:
Up to 25% of the assets under management (AUM) can be invested in unlisted securities, such as Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), or unlisted debt securities. This is allowed in addition to investments permitted for discretionary managers.
If the 25% limit is crossed because of something the investor does (e.g., subscribing to a rights issue), it’s considered a violation. However, if it happens due to corporate actions (like receiving bonus shares), it’s not a violation.
Prohibited activities include:
Using borrowed money (leverage) to invest in derivatives.
Using funds for bill discounting, financing, or lending.
Making investments based on advice from other entities.
Engaging in speculative transactions (except in derivatives) that don’t involve actual delivery of securities.
Investing in mutual funds unless it’s through a direct plan, which avoids extra fees for clients.
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Client Agreement and Disclosure Document
Before starting, the portfolio manager and client must sign a written agreement, as required by Regulation 22 and Schedule IV. This agreement includes:
The investment goals and strategy.
The services provided (e.g., advice, management, or custody of securities).
How long the agreement lasts and conditions for ending it early.
The types of investments allowed and any restrictions.
Risks involved in the portfolio.
Fees and expenses.
How securities will be held (custody arrangements).
Before signing, the manager must give you a Disclosure Document (Schedule V), which is checked by an independent chartered accountant. This document explains:
The fee structure (fixed fees, performance-based fees, or a mix, but no upfront fees are allowed).
Risks of the portfolio.
The manager’s performance over the last three years.
Audited financial statements.
Any transactions with related parties (e.g., companies connected to the manager).
SEBI does not review or approve this document, so the manager is responsible for ensuring it’s accurate.
Reporting and Custody Responsibilities
Most portfolios require a custodian (a third party that safely holds your securities), and the manager must ensure the custodian follows all laws. For example, Barclays Securities India uses SEBI-approved custodians. If the service is only advisory (no management), a custodian may not be needed.
Portfolio managers must send you reports at least every three months (Regulation 31). These reports include:
The makeup and value of your portfolio.
Details of transactions made.
Any benefits received by the manager.
Expenses charged to your account.
Risks involved.
Any defaults or rule violations.
Commissions paid to distributors (if any).
Details of how your securities are held (custody).
Code of Conduct and Avoiding Conflicts of Interest
Portfolio managers must follow a strict Code of Conduct (Schedule III), which requires them to:
Act with honesty, fairness, and care.
Avoid situations where their interests conflict with yours.
Disclose any potential conflicts and get your consent if needed.
Deal with related companies fairly, on an arm’s length basis, meaning no special favors.
This ensures your interests always come first.
Summary
Non-discretionary investment management agreements in India, governed by SEBI, allow you to stay in control of your investments while getting expert advice. You need at least INR 50 lakhs to invest, and managers must follow strict rules on transparency, reporting, and avoiding conflicts of interest. These agreements are designed to protect you, ensure fairness, and help you make informed investment decisions.
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Non-Discretionary Investment Management Agreements: FAQs
Q1. What is the minimum investment for a non-discretionary investment management agreement in India?
You need to invest at least INR 50 lakhs, as per SEBI’s 2020 regulations. This applies to new clients and new investments. Investments made before January 21, 2020, are allowed to continue under older rules until they mature.
Q2. How is non-discretionary different from discretionary portfolio management?
In non-discretionary services, the manager gives advice and follows your instructions for investments, so you have full control. In discretionary services, the manager makes investment decisions for you based on agreed goals, without needing your approval for each move.
Q3. What information must a portfolio manager provide?
Before signing the agreement, you get a Disclosure Document with details on fees, risks, past performance, and financial statements. Every three months, you receive a report on your portfolio’s value, transactions, expenses, risks, and any issues.
Q4. Are there limits on what a non-discretionary portfolio manager can invest in?
Yes, only 25% of the portfolio can be in unlisted securities like AIFs, REITs, or InvITs. Managers cannot use funds for things like lending, bill discounting, or speculative trades (except derivatives), and mutual fund investments must be through direct plans to avoid extra fees.
