PMS Inner Workings: Banking Partners, Custody Structure, and Trading Execution

(This article is Part 4 of 6 in our PMS Guide for NRIs: The Nuts and Bolts series)

Here's where things get interesting. A PMS operates through a four-legged structure for NRIs, and understanding this setup is crucial for knowing where your money actually sits and how it moves.

The Portfolio Manager is the brain of the operation. They make investment decisions, conduct research, and manage your money according to the agreed strategy. Think of them as your dedicated fund manager, but one who works exclusively on discretionary mandates.

The discretionary nature is crucial to understand – your manager will not come asking for your approval before each buy and sell decision. This eliminates the time difference challenges, knowledge gaps, and accountability issues that plague non-discretionary models. As we covered in detail under "PMS explained > Different Types of PMS," this operational approach is what makes PMS work effectively for NRIs.

The manager will also work around any specific restrictions you have – whether that's avoiding certain sectors, maintaining minimum cash levels, or structuring the portfolio for tax efficiency in your country of residence.

The choice of Portfolio Manager is crucial. Some portfolio managers focus on a specific approach – value investing, growth investing, momentum strategies, or sector-specific themes. Other PMs may have multiple approaches in their toolkit and can customize the mix for each client based on their specific requirements. This flexibility allows them to align investment strategy with your risk appetite, time horizon, and financial objectives.

The Banking Partner creates a dedicated financial infrastructure for your PMS investments. Unlike resident Indians who can use their existing bank accounts, NRIs must set up a separate NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account exclusively for PMS purposes. This account also requires PIS (Portfolio Investment Scheme) approval from the designated bank.

Understanding PIS (Portfolio Investment Scheme): PIS is a regulatory framework established by RBI that allows NRIs to invest in Indian secondary market securities (individual stocks, bonds, convertible debentures). Think of PIS as your official permission slip to buy and sell individual Indian stocks.

Important distinction: PIS is required for secondary market investments (individual stocks) but NOT for primary market investments like mutual funds. NRIs can invest in mutual funds directly through their NRE/NRO accounts without needing PIS approval.

The PIS approval is linked to your specific bank account and becomes the designated conduit for all your Indian stock market investments through that bank.

For PMS, the PIS requirement depends on the investment approach:

Direct Stock PMS: Requires PIS account as you're buying individual securities
Mutual Fund PMS: May be offered through direct NRE/NRO accounts without PIS, depending on the provider

Practical recommendation: Consider opening a PIS account regardless of your initial PMS approach. This avoids the operational hassle of additional documentation and approvals later if you decide to expand into individual stock investments or switch PMS strategies.

NRE PIS Account is suitable when you're funding your PMS with foreign currency earnings. Money in NRE accounts is freely repatriable – you can send both principal and gains back to your country of residence without RBI approval. The funds are held in Indian rupees but maintain their foreign exchange character. NRE PIS works well for NRIs who want to invest fresh foreign earnings in Indian markets and potentially repatriate gains later.

NRO PIS Account makes sense when you're investing Indian-sourced income – rental income from Indian properties, dividends from existing Indian investments, or funds that were already in India before you became an NRI. NRO accounts allow repatriation of up to $1 million per financial year without requiring RBI approval, though you need to follow the prescribed documentation process through your bank. It's often the practical choice for NRIs with significant Indian income or assets.

The key advantage of both structures: your funds always remain in your name in your dedicated PIS-enabled bank account. The PMS provider cannot access your money directly – they can only give instructions to the custodian for facilitating purchases and sales using your funds. When you need to add money to your portfolio, it goes into your PMS bank account. When you withdraw funds, they come from your account. This creates a clear audit trail and ensures that your money never gets pooled with other investors' funds.

The Custodian is perhaps the most important component for NRIs to understand. This is where your securities actually live. The custodian – typically a large bank or a depository participant – holds your stocks in a separate demat account with your name clearly identified.

Your PMS account isn't a pooled account where your money gets mixed with others. Every stock purchased for your portfolio sits in your name in the custodian's records. When Reliance Industries announces a dividend, it comes to you. When TCS does a bonus issue, those bonus shares get credited to your account. You're the legal owner of every security.

The direct ownership structure in PMS gives you a significant benefit of choice. You have the choice to participate in buybacks or not, and most importantly, the choice to execute tax loss harvesting. Tax loss harvesting is when you book some losses in your portfolio to offset gains and reduce tax liability. This only comes with direct ownership.

For US tax residents (including US-based NRIs), the US wash sale rule applies to all their investments worldwide, including Indian stocks. This means US residents cannot claim tax losses on Indian stocks if they repurchase the same or substantially identical securities within 30 days before or after the sale. This is where professional PMS management becomes particularly valuable. This professional oversight can be helpful to capture tax benefits without inadvertently violating US tax rules – something that would be difficult to manage consistently with direct investing.

This creates an interesting dynamic: while the Indian tax system allows flexible tax loss harvesting, US tax residents must navigate the 30-day wash sale restriction when planning their Indian investment strategies. In PMS, because you have direct ownership of stocks, you can make informed choices on these actions, and a skilled portfolio manager can work within the applicable tax rules of your residence country.

This is very unique to PMS – both MF and AIF investments don't give you direct ownership of stocks. MF and AIF both issue you units from pooled holdings, eliminating this level of control and strategic tax planning flexibility.

The custodian structure applies to both resident and non-resident PMS, and these benefits are enjoyed equally by both types of investors, subject to the tax rules of their respective countries of residence.

For NRIs, this custodial structure solves a massive operational headache. You don't need to maintain your own demat account with a separate depository participant. You don't need to track corporate actions, handle rights issues, or manage the paperwork that comes with direct stock ownership. The custodian handles all of this, but the ownership remains crystal clear.

The Trading Member is the execution arm. When your portfolio manager decides to buy 500 shares of Infosys or sell your holding in HDFC Bank, the trading member executes these orders in the market. They have access to stock exchanges and handle the actual buying and selling.

This triangular structure creates something beautiful for NRIs: professional management without operational complexity. Your portfolio manager makes the decisions, the trading member executes them, and the custodian keeps everything safe and properly documented.

But here's what makes this especially valuable for NRIs: regulatory compliance is built into the structure. The custodian ensures that all your investments comply with RBI and FEMA regulations. Foreign exchange reporting happens automatically. Corporate action benefits are processed without you having to chase Indian companies or their registrar and transfer agents.

One common NRI concern: "What happens if the PMS provider shuts down?" Here's the beauty of the custodial structure – your securities don't disappear. They're held separately by the custodian, not by the portfolio management company. If a PMS provider faces financial difficulties, your stocks remain safe in the custodial account. You can transfer your portfolio to another PMS provider or even take direct control if needed.

This structure also creates accountability. The portfolio manager can't access your securities directly – they can only give instructions to buy or sell. The custodian can't make investment decisions – they can only safeguard and process legitimate instructions. The trading member can't hold your securities – they can only execute trades as instructed.

For NRIs dealing with distance and time zones, this structure means you're never dependent on a single point of failure. Professional management continues regardless of your availability, while multiple parties ensure that your interests are protected through checks and balances.

Power of Attorney: The Key That Unlocks Everything

The four-legged structure is solid, but how does it all come together? You make it happen. By signing a Power of Attorney.

Think of it like giving your house keys to a trusted property manager while you're living overseas. You wouldn't hand over those keys to just anyone, and you'd want clear rules about what they can and cannot do in your house. The PMS Power of Attorney works exactly the same way – it's your way of saying "here are the keys to my portfolio, but here are the specific rooms you can enter and the exact tasks you can perform."

This is where many NRIs pause and take a deep breath. The idea of giving someone else legal authority to buy and sell securities on your behalf feels like a big step, especially when you're sitting in a different continent. If you're feeling nervous about this, you're not alone. Every NRI investor has had this exact moment of hesitation.

The Power of Attorney you sign for PMS is not a blank cheque. It's more like giving someone a prepaid card with a specific spending limit and clear instructions on what they can buy. The PoA is precisely crafted to allow only investment-related activities within the agreed mandate – nothing more, nothing less.

What the PoA allows:

Buying and selling securities according to the agreed investment strategy
Giving instructions to the custodian for settlement of trades
Receiving corporate action benefits like dividends, bonuses, and rights issues on your behalf
Making decisions on corporate actions where choices are required (like rights issues)
Providing investment instructions to the trading member

What the PoA does NOT allow:

Withdrawing money from your accounts
Transferring securities to anyone else's name
Taking loans against your securities
Making investments outside the agreed mandate
Any activity not directly related to portfolio management

The PoA is like the oil that enables your portfolio manager to set your investment machinery in motion. Without it, you have all the components – a skilled portfolio manager, a robust banking partner, a reliable custodian, and an efficient trading member – but they can't work together. The PoA is what transforms these separate services into a functioning, coordinated system.

For NRIs, this oil is even more critical. You're not just across the city where you could drop by for a quick signature. You're across continents, across time zones, often across seasons. The PoA ensures that your investment strategy doesn't get stuck waiting for your availability. It keeps the machinery running smoothly.

Safeguards and oversight: The PoA doesn't operate in isolation. The custodian maintains your securities separately and provides regular statements. The trading member generates contract notes for every transaction. Regulatory authorities monitor all transactions. If something goes wrong, there's a clear audit trail showing exactly what happened and when.

Most importantly, you retain the right to revoke the PoA at any time. If you're unhappy with the portfolio manager's performance or want to change providers, you can withdraw the authorization and transfer your portfolio elsewhere.

The operational reality is simple: the PoA is what transforms a collection of services – portfolio management, custody, and trading – into a seamless investment solution that works regardless of where you live or what time zone you're in.

Read other sections of the guide here :

At Capitalmind, we help NRIs optimize their Indian investments through compliant, growth-oriented strategies. For more details, write to us at connect@capitalmindwealth.com

Disclaimer : This article does not constitute any solicitation of securities business from Residents of the United States of America or from a jurisdiction where accessing this without proper registration is restricted.

PMS Inner Workings: Banking Partners, Custody Structure, and Trading ExecutionPMS Inner Workings: Banking Partners, Custody Structure, and Trading Execution

Power of Attorney: The Key That Unlocks Everything

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