On February 10, 2023, the Securities and Exchange Board of India (“SEBI”) issued an informal guidance (“Informal Guidance”) on the SEBI (Portfolio Managers) Regulations, 2020 (“PM Regulations”) in response to a request from Motilal Oswal Asset Management Company Limited (“MOAMC”).
Regulation 22 of the PM Regulations requires a portfolio manager to enter into an agreement in writing with each of its clients, that clearly sets out mutual rights and obligations. Schedule IV of the PM Regulations specifically sets out that the quantum and manner of payment of fees and charges for each activity must form part of the agreement to be executed by a client. SEBI noticed that clauses relating to fees and charges in the portfolio manager-client agreement did not always clearly reflect the fees and charges payable by the client and manner of computation of the same. Therefore, SEBI issued a circular dated October 5, 2010 (“2010 Circular”), wherein Clause 4(j) stated that “New clients shall be required to separately sign the annexure on fees and charges and add in their own handwriting that they have understood the fees/charges structure” (“Specified Provision”).
MOAMC is registered with SEBI as a portfolio manager. MOAMC submitted to SEBI that in case of electronic writing, not all investors are well equipped with relevant software/hardware to support electronic writing through stylus pen or using their fingers. To avoid delays on this this account, MOAMC proposed to SEBI the following process and sought SEBI’s guidance on whether the afore-mentioned process would be in compliance with the 2010 Circular: During the verification process, the new client shall capture their live photo and accept the declaration pre-typed for the terms and fee structure and upload their specimen signature in this panel. Upon acceptance of declaration, IP and GPS will be captured and stored. Users must declare and provide a reason if their signature is different from the signature on their PAN card.
SEBI noted the relevant provisions (mentioned above) and observed that the intent of the Specified Provision is to ensure that the client has understood and acknowledged the “fees and charges” structure. SEBI referred to an interpretative letter dated May 20, 2021 issued by SEBI in case of Purnartha Investment Advisers Private Limited (“Purnartha Informal Guidance”), where it had been held that for compliance with the Specified Provision, the clients may sign the annexure using electronic signature as per the IT Act and write electronically that they have understood the fees/charges structure, using their fingers or stylus pen on the relevant portion of the annexure on fees, accessed by them on touch sensitive screen of their computing device.
SEBI has opined that MOAMC’s proposal would cause clients to accept pre-typed declarations by clicking on appropriate checkboxes and this completely avoids the requirement of clients writing the required text regarding them understanding the fees/charge structure. Therefore, MOAMC’s proposal would not be in compliance with the Specified Provision.
This informal guidance lays down in unequivocal terms that using an electronic signature and writing electronically cannot be equated to ticking pre-typed declarations and is expected to go a long way in protecting the investors’ interests.
This update has been contributed by Vinod Joseph (Partner) and Smriti Tripathi (Senior Associate).
Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.
11, 1st Floor, Free Press House
215, Nariman Point
Mumbai – 400021
9 – 10 Bahadur Shah Zafar Marg
Delhi – 110002
+91 11 23701284/5/7
155, ESC House, 2nd floor,
Okhla Industrial Estate, Phase 3,
New Delhi – 110020
68 Nandidurga Road
Bengaluru – 560046
3rd Floor, 27B Camac Street
Kolkata – 700016
The rules of the Bar Council of India do not permit advocates to solicit work or advertise in any manner. This website has been created only for informational purposes and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work in any manner. By clicking on 'Agree' below, you acknowledge and confirm the following:
a) there has been no solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
b) you are desirous of obtaining further information about us on your own accord and for your use;
c) no information or material provided on this website is to be construed as a legal opinion and use of this website will not create any lawyer-client relationship;
d) while reasonable care has been taken in ensuring the accuracy of the contents of the website, Argus Partners shall not be responsible for the results of any actions taken on the basis of information provided in this website or for any error or omission in the website; and
e) in cases where the user has any legal issues, the user must seek independent legal advice.