The Indian market regulatory, SEBI (Securities and Exchange Board of India) has recently released a circular (May 2024) to portfolio managers to facilitate ease in the digital onboarding process for clients and enhance transparency through additional disclosures. The changes shall be applicable from October 1, 2024.

SEBI introduced a few changes in May 2024, here is what has changed:

Digital onboarding changes

To begin with, as per the latest circular, the digital onboarding procedure eliminates the requirement for clients/investors to provide handwritten notes. Starting in October, investors or clients are required to provide typed or electronically written acknowledgements regarding their understanding of fee structures. 

Additionally, portfolio managers are obligated to ensure that new clients sign an annexure detailing fee structures. In the case of physical onboarding, clients are expected to include a handwritten note affirming their understanding. But in the case of digital onboarding, clients may provide the acknowledgement online - via a keyboard or a stylus pen.

Fee structure tool and disclosures

SEBI has introduced further enhancements to promote transparency and understanding of fee structures. Portfolio managers must provide clients with a fee calculation tool that highlights the various fee options with multi-year fee calculations. Such a tool shall add the high-watermark principle wherever applicable. High-watermark is the highest value that the portfolio (of investors) has reached at the end of the year (or the date when the fee is charged). This fee calculation tool, which will be provided to clients, aims to improve client understanding of fee structures. 

Further, when performance fees are levied, the annexure for “fees and charges” will include one-year and multi-year fee illustrations covering different scenarios, including changes in portfolio value. The portfolio manager shall ensure no additional fees or charges are levied, other than the ones mentioned in the annexure on “fees and charges” to any client.

Most important terms and conditions (MITC) 

To ensure clients are fully informed about the portfolio manager-client relationship, portfolio managers will furnish a MITC document, which clients must acknowledge. These measures collectively aim to enhance transparency, comprehension, and client protection, representing a significant advancement in the digitisation and regulation of portfolio management services (PMS).

SEBI has tasked the Association of Portfolio Managers in India (APMI) with establishing standard procedures for digital client onboarding in consultation with them.

Benefits of changes made by SEBI

• Streamlined onboarding procedure: Previously, the onboarding process required multiple physical signatures from clients, leading to tediousness. This process is now simplified by requiring just one signature on the annexure agreement using a stylus pen.
  
  
• Reduced paperwork: In addition to the burdensome paperwork, clients had to submit a handwritten note acknowledging the annexure of fees in the agreement, adding to their workload, which is no more a concern moving forward with digital onboarding.
  
  
• Improved transparency between portfolio managers and clients: The regulator aims to enhance transparency by introducing the Master Information and Transaction Checklist (MITC), requiring portfolio managers to furnish all fund information and keep clients informed. For existing clients, MITC information will be communicated via email or other suitable modes by January 1, 2025.
  
  
• Comprehensive fee structure with fee calculation tool: Portfolio managers will provide a fee calculation tool to clients, offering various fee options with multi-year calculations. This tool will incorporate the high-watermark principle where applicable. The link to access this tool will be provided to all new clients onboarded on or after October 1, 2024.

• Expedited client/investor account activation: Previously, physical onboarding took approximately 7 to 10 working days for client account activation. The digital onboarding process now ensures activation within 2 to 3 working days.

Takeaway 

SEBI has introduced some enhancements to streamline the process of enrolling for portfolio management services in India digitally, effective October 2024. Essentially, this means bidding farewell to handwritten confirmations!

Clients can now acknowledge fee structures electronically. To help you understand the fees better, portfolio managers will provide a tool that shows different fee options and how they are calculated. 

Additionally, they will furnish a document outlining the crucial terms and conditions. These changes collectively result in a more transparent, secure, and faster onboarding into PMS investment.

To understand the fee structure of PMS better, read PMS Bazaar's elaborate coverage (Read HERE). And remember, always consult your financial advisor before making any investment decisions.