NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors

Regulatory, Governance and Ethical Aspects of Portfolio Managers: formula sheet

Full chapter guide

Key formulas

Minimum net worth: Net worth of a portfolio manager ≥ ₹5 crore; A continuing capital adequacy requirement. Pick 'at least ₹5 crore', not a lower or an exact-amount option.
Minimum investment per client: Client's investment with the portfolio manager at onboarding ≥ ₹50 lakh (accredited investors may be exempted); Can be in funds, securities or a combination. It applies per client, not to the whole firm. Accredited investors can be onboarded below this minimum.
Discretionary service: Discretionary = manager decides on investments, under the contract; The manager exercises discretion on the client's behalf.
Non-discretionary service: Non-discretionary = manager manages funds in accordance with the client's directions; The individual decisions are made as the client directs. The manager has no discretion of its own.
Advisory service: Advisory = manager advises the client on portfolio decisions, under a contract; decisions rest with the client; The manager gives advice on the portfolio. The decisions rest with the client.
Who can register: Applicant = body corporate + fit and proper + SEBI registration; An individual or an unregistered entity cannot offer PMS.
Minimum investment per client: Minimum = ₹50 lakh (funds, securities or both); Applies to each client under the 2020 Regulations. Accredited investors may be accepted at a lower amount.
Accredited investor: Status granted by a recognised accreditation agency; It is not self-declared. It allows relaxations, including a lower minimum ticket size.
Order of onboarding: KYC → disclosure document → agreement → account opening; Disclosure document must reach the client before the agreement is signed.
Client assets segregation: Client funds and securities ≠ manager's own assets; Each client has a separate account. No pooling of client assets.
Disclosure document filing: Filed with SEBI through a SEBI-prescribed format; certified by a merchant banker or a peer-reviewed firm as required; Confirm the exact filing and certification wording in the workbook before answering.
Certification: Valid NISM-Series-XXI-A certificate = required; validity = 3 years from exam date; Expired certificate means the distributor is not eligible to distribute until the exam is cleared again.
Direct onboarding: Client may join without a distributor; no distribution cost to that client; The portfolio manager must offer this option. Distributor involvement is never compulsory.
Commission model: Distributor commission = trail, paid by portfolio manager from its fee; upfront commission and entry load = not allowed; Commission is not a separate charge on the client's portfolio.
Trail commission (illustration): Annual trail = commission rate % × client's average assets under management (AUM) for the year; Use the rate stated in the question. Check whether the base is AUM or the fee.
XXI-A exam pattern: 100 MCQs × 1 mark; 2 hours; pass 60%; negative marking 10% of the question's marks; A wrong answer on a 1-mark question costs 0.1 mark.
Fiduciary rule: Client's interest > manager's own interest; If an option shows the manager benefiting at the client's cost, it is almost always wrong.
Conflict handling order: Avoid → Disclose → Manage; Where a conflict cannot be avoided, it must be disclosed to the client and managed fairly.
Insider trading test: UPSI + dealing or communicating = prohibited; Applies to trading for self, firm or clients, and to tipping others. Information already public is not UPSI.
Suitability test: Recommendation must match objectives + risk profile + circumstances; Based on client profiling done before investing.
Confidentiality rule: Client information shared only with client consent or legal requirement; Disclosure to regulators when required by law is allowed.
Complaint escalation order: Portfolio manager → SCORES → ODR; The client first complains to the portfolio manager. SCORES and then ODR are the escalation routes. Do not put ODR before the entity.
SCORES response timeline: Entity replies on SCORES within 21 days; Under SEBI's SCORES framework the entity is expected to respond within 21 days. Confirm against your latest workbook edition.
Inspection duty: SEBI inspects → portfolio manager gives access to books, records and documents → report to SEBI; Non-cooperation is itself a violation.
Range of actions for violations: Warning / directions / monetary penalty / suspension / cancellation of registration / prosecution; Cancellation and suspension are the most severe regulatory actions on the licence. Monetary penalty is a separate power.
Natural justice: Notice + opportunity of hearing before adverse action; A show cause notice precedes penalty or licence action in the normal course.

Quick revision

PMS is governed by the SEBI (Portfolio Managers) Regulations, 2020.
Know the three service types: discretionary, non-discretionary and advisory.
Client money and securities must be kept apart from the portfolio manager's own.
The agreement between portfolio manager and client must be signed before services begin.
The disclosure document gives the client the information needed to decide; know its key contents.
Fees and charges must be disclosed up front in the agreement; do not assume any fee is allowed unless disclosed.
Learn the minimum investment amount per client from the workbook as stated.
Distributors must follow the registration and certification requirements applicable to them.
Disclose any conflict of interest to the client; do not hide it.
Clients' interests come before the distributor's commission.
Know the grievance route for clients, including SEBI's complaint system.
Penalties and action follow breaches found in inspection or complaints.

Common mistakes

Confusing the ₹5 crore net worth with the ₹50 lakh client minimum. Fix: Link ₹5 crore to the firm's capital adequacy and ₹50 lakh to each client's investment at onboarding.
Saying non-discretionary PMS means the manager takes decisions without asking the client. Fix: Remember: discretion belongs to the manager only in discretionary PMS. In non-discretionary PMS, the manager manages the funds in accordance with the client's directions.
Applying ₹50 lakh as a total limit for the manager rather than a per-client minimum. Fix: Remember it is the minimum for each client, measured on funds, securities or both.
Assuming an investor can declare themselves accredited. Fix: Accredited status is granted by a recognised accreditation agency. Self-declaration does not count.
Treating upfront commission as allowed if it is disclosed. Fix: For PMS, remember distribution commission is on a trail basis and there is no entry load. Disclosure does not make an upfront payment permissible.
Thinking the distributor's commission is charged to the client on top of the portfolio manager's fees. Fix: The portfolio manager pays the distributor out of its own fee. The client does not pay an extra distribution charge.
Thinking a conflict of interest is always illegal. Fix: A conflict is a situation. It becomes a breach when it is hidden or the client is harmed. Remember avoid, disclose, manage.
Treating disclosure as enough to justify any action. Fix: Disclosure does not excuse unsuitable advice or unfair treatment. The client's interest still comes first.
Placing ODR before SCORES or before the portfolio manager. Fix: Remember the order: entity, SCORES, ODR. ODR is for unresolved or unsatisfactory outcomes.
Thinking SCORES is a court that gives binding awards. Fix: SCORES is a complaint registration and tracking system. Conciliation and arbitration happen on ODR.

Exam tips

Memorise the two rupee figures separately: ₹5 crore net worth for the manager, ₹50 lakh minimum per client.
In service-type questions, look for the one phrase that shows who decides. That phrase gives the answer.
Check the qualifier: 'at least' means a minimum, 'registered' means SEBI registration, 'body corporate' rules out individuals.
Answer from the 2020 Regulations and the current NISM workbook. This paper has negative marking of 10% of the marks assigned to a question (0.1 mark per wrong answer), so do not guess blindly between two options you cannot separate.
If two options differ only by a number, trace which entity the number applies to: firm or client.
Memorise ₹50 lakh as the per-client minimum and remember that accredited investors get a lower floor.
When an option says the document is given after signing, mark it wrong.
Distinguish the disclosure document from the agreement by purpose: information versus contract.