PASS Securities Operations and Risk Management Examination Difficulty: Beginner 2 Questions   5 min read
📌 Chapter 8.4 — PORTFOLIO MANAGEMENT SERVICE

Consider a scenario in your back office where a Portfolio Manager (PM) managing a large discretionary corpus decides to pivot from large-cap blue chips into a cluster of small-cap companies and unlisted debt instruments. As an operations professional, your first instinct should be to verify the internal limit registers against the latest SEBI mandate to ensure the PM is not inadvertently drifting into restricted territory.

Portfolio Management Services (PMS) operate under a framework where discretionary power is a double-edged sword; while it allows the PM to act decisively, it simultaneously places the burden of compliance squarely on your firm’s risk management and operations team to prevent regulatory breaches.

Under current SEBI regulations, discretionary portfolio managers are prohibited from investing client funds in unlisted securities, with very narrow exceptions designed for specific structured products or regulatory-approved ventures. This restriction is fundamentally about protecting the client from the extreme liquidity risks and valuation opacity inherent in unlisted equity or debt.

If your system flags a trade execution order for an unlisted security, it is not merely a technical error but a potential regulatory violation that could compromise the firm’s ‘fit and proper’ status. From an operational perspective, you must ensure that all investment mandates are coded into the order management system (OMS) such that any proposed trade exceeding these guardrails triggers an immediate pre-trade block.

Beyond just the ‘what’ of the investment, you must manage the ‘how’ by ensuring that the assets held by the PMS are not deployed into speculative instruments or forbidden structures like badla-style financing. For instance, if an HNI client requests that their portfolio be leveraged through derivatives or moved into private equity vehicles, your team must confirm this aligns with the signed Investment Management Agreement (IMA).

Mismanagement here leads to costly reconciliation errors or, worse, client litigation when performance reports fail to account for the risk profile of these unauthorized instruments. Your role is the final firewall, ensuring the client’s capital remains within the prescribed boundaries of their risk appetite and statutory limitations, protecting them from the volatility of non-standard, unlisted assets.

Nuance

⚠️ Nuance
A common pitfall for candidates is conflating the investment restrictions of discretionary managers with those of non-discretionary managers or mutual funds. Many assume there is a fixed percentage ceiling for unlisted securities in discretionary PMS, but the reality is much stricter: discretionary managers are essentially barred from such investments, whereas non-discretionary managers may have specific, albeit limited, headroom. Always check the current SEBI master circular for the latest ‘unlisted security’ thresholds, as these are subject to regulatory updates that frequently catch out those relying on outdated study materials.

Check Your Understanding

Practice Question 1

A discretionary portfolio manager intends to allocate 10% of a client’s portfolio into unlisted debt instruments to boost yield. As an operations officer, what is your primary regulatory response?

Practice Question 2

Which of the following activities constitutes a breach of the operational controls required for a discretionary portfolio manager under SEBI regulations?

This is a companion read for Section 8.4 — PORTFOLIO MANAGEMENT SERVICE from PASS Securities Operations and Risk Management Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 `Akhilesh Gururani. All rights reserved.