SEBI revises norms for computing fees and charges of portfolio managers

The Securities and Exchange Board of India (SEBI) has asked portfolio managers to compute profit / performance of a company on the basis of high water mark principle over the life of the investment, for charging of performance / profit sharing fee.

This, the market regulator said, is aimed at bringing about greater uniformity, clarity and transparency with regard to fees and charges of portfolio managers.

SEBI said the decision has been taken after verification of complaints from clients relating to fees and charges being levied by portfolio managers. "It has been found that the clauses relating to fees and charges in the portfolio manager-client agreement do not always clearly reflect the fees and charges payable by the client and the manner of computation of the same," SEBI noted.

Profit sharing / performance related fees are usually charged by portfolio managers upon exceeding a hurdle rate or benchmark as specified in the agreement. However, there is no uniformity in practice on how the profit / performance of the portfolio computed, SEBI pointed out.

High water mark is the highest value that the portfolio/account has reached. Value of the portfolio for computation of high watermark should be taken to be the value on the date when performance fees are charged. For the purpose of charging performance fee, the frequency should not be less than quarterly. The portfolio manager should charge performance-based fee only on increase in portfolio value in excess of the previously achieved high water mark.

Accordingly, when a client's initial contribution of Rs10,00,000 rises to Rs12,00,000 in its first year, the portfolio manager should consider fee/ profit sharing on the Rs2,00,000 return. In the next year, if the portfolio value drops to Rs11,00,000 no performance fee would be payable. If in the third year, if the portfolio rises to Rs13,00,000, a performance fee/profit sharing would be payable only on the Rs1,00,000 profit which is portfolio value in excess of the previously achieved high water mark of Rs12,00,000, rather than on the full return during that year from Rs11,00,000 to Rs13,00,000.