Under SEBI regulations governing segregated portfolios (side-pocketing) created following a credit event, what restrictions apply to AMC management fees and Total Expense Ratio (TER)?

[ A ]The AMC must charge a double investment management fee of 5.0% to cover legal recovery expenses.

[ B ]All operating expenses of the segregated portfolio must be charged directly to the main liquid scheme portfolio.

[ C ]The AMC shall not charge any investment and advisory fees on the segregated portfolio, and recurring TER can only be charged pro-rata upon actual recovery of funds.[ CORRECT ]

[ D ]The AMC is permitted to liquidate the segregated portfolio and forfeit 100% of proceeds as administrative penalties.

Takeaway

Option C is correct: The AMC shall not charge any investment and advisory fees on the segregated portfolio, and recurring TER can only be charged pro-rata upon actual recovery of funds.

Derivation

Under SEBI's segregated portfolio framework, the AMC is strictly barred from charging any investment management and advisory fees on the distressed segregated portfolio. Non-management TER (e.g., custodian, audit, legal charges within statutory caps) can only be charged on a pro-rata basis upon actual recovery of proceeds from the defaulted issuer. In no circumstance can segregated portfolio expenses be shifted or charged to the main portfolio. This question tests side-pocketing accounting rules. A common error is assuming normal management fees continue to accrue on bad debt.

Why the others fail

A — The AMC must charge a double investment management fee of 5.0% to cover legal recovery expenses.

Charging management fees on defaulted assets is illegal; SEBI explicitly prohibits investment and advisory fees on segregated assets.

B — All operating expenses of the segregated portfolio must be charged directly to the main liquid scheme portfolio.

Shifting costs of a segregated portfolio to the main liquid portfolio is strictly prohibited to ensure fair accounting ring-fencing.

D — The AMC is permitted to liquidate the segregated portfolio and forfeit 100% of proceeds as administrative penalties.

All recovered proceeds from the segregated portfolio belong 100% to the unitholders who held units at the time of the credit event.