Discretionary Portfolio Manager Exceeds Unlisted Cap and Charges Fee on Unrealised Gains

There are at least four breaches. First, 40% in unlisted debentures exceeds the disclosed 25% cap, so the portfolio is outside the mandate. Second, there is no written client consent for the unlisted investment, even though unlisted securities carry valuation and liquidity risks that require clear authorisation. Third, the manager charged a performance fee on an unrealised mark-to-market gain when the disclosure document says the fee is calculated on realised gains; the fee is therefore unauthorised. Fourth, the issuer's director is the manager's brother, creating a conflict of interest that required written disclosure and, depending on the mandate, client consent or avoidance. The 35% mark-up based on a founder's email is not an independent valuation and inflates both the portfolio value and the fee. The manager has also breached the fiduciary duty to act within the disclosed investment objective.

Reverse the ₹1.9 lakh performance fee and credit the client account immediately; the fee was not earned under the disclosed formula. Recalculate the portfolio value using an independent valuation policy; a founder's email is not sufficient evidence of fair value for an unlisted debenture. Reduce unlisted exposure to the 25% cap or obtain the client's informed instruction, but do not treat retrospective consent as a cure for a breach that has already occurred. Disclose the brother-director conflict in writing, obtain the client's decision on whether to continue holding the debentures, and if the conflict was not consented to, exit the position in an orderly manner. Review all other client portfolios for similar unlisted exposure, fee calculations and related-party holdings. Document the valuation basis, the fee reversal and the conflict disclosure.

Inform the client of the breaches and the remediation steps, and offer an option to exit the mandate without penalty. Compensate the client for the unauthorised fee and for any loss caused by the breach, including any loss from the conflict transaction. Correct the portfolio and provide a revised statement. Report the material breach to SEBI as required for a registered portfolio manager, and preserve all records of the trade, valuation, fee and client communication. Review whether the manager's brother or his company received any benefit that requires disgorgement or further action. The compliance officer should also assess whether the manager's conduct triggers a code-of-conduct or fitness-and-propriety issue, and should not allow the manager to handle the client's account while the investigation is open.