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Sebi rules reduce risk in PMS, but only slightly


Last week, capital markets regulator Securities and Exchange Board of India (Sebi) announced a series of board decisions concerning portfolio management services (PMS). The regulator hiked the minimum ticket size for investing in PMS from 25 lakh to 50 lakh. It also hiked the minimum net worth required for a PMS provider from 2 crore to 5 crore. In addition, Sebi announced a series of other decisions such as capping investments by PMS products in unlisted securities, eligibility criteria for PMS distributors and the requirement of a custodian.

The decisions are aimed at lowering the risk for retail investors by improving transparency in PMS products in India. We give you the details.

The current change

In addition to its decisions on the investment ticket size and net worth, Sebi has imposed some caps on unlisted securities in PMS products. The regulator has restricted discretionary PMS products to invest only in listed securities, money market instruments and mutual funds. Discretionary PMS products allow the PMS manager to manage the portfolio without needing the client’s consent for every transaction. In case of non-discretionary PMS, which do need the client’s consent for transactions, Sebi has restricted exposure to unlisted securities at 25% of the corpus.

Sebi has also enhanced the eligibility criteria for the role of the principal officer of the PMS. In addition to the principal officer and compliance officer, PMS providers will be required to employ one more person who fits the defined eligibility criteria. Sebi also restricted off-market transactions between client accounts in a PMS with certain exceptions.

A number of other decisions related to PMS services are on the anvil, according to media reports. Prominent among these is the decision to give investors a “direct option" for PMS akin to the direct plans of mutual funds. This will allow investors to buy PMS products without paying distributor commissions.

In addition, the Sebi Working Group has recommended that distributors who have passed the National Institute of Securities Markets (NISM) exams and are registered with the Association of Mutual Funds in India (Amfi) be allowed to distribute PMS products.

PMS managers will also be required to report their performance in a standardized manner. PMS operational charges, except brokerage, will be capped at 0.5% of the corpus, but there will be no overall cap on charges, said the recommendations.

Impact on PMS industry

Anish Teli, founder of IndexAlpha, a Sebi-registered PMS, noted that “the increase in investment limit and net worth criteria are likely to slow down the growth seen by the PMS industry, since the market of potential investors will reduce with the doubling of the minimum investment amount to 50 lakh. The increase in net worth requirements to 5 crore will also limit the number of new/existing businesses that want to obtain/retain Sebi’s PMS registration."

As Mint wrote earlier, the doubling of the minimum ticket size may drive many investors to platforms such as Smallcase which have no regulatory minimum ticket size.

What it means for you

The new PMS regulations have tried to bring down the risk in these loosely regulated and opaque products. The restrictions on their investment in unlisted securities will also improve liquidity, which has been a key concern for PMS products investing in the mid- and small-cap space. Moreover, a direct plan for PMS investors, if and when notified, will lower your investment costs substantially.

In other words, at its core, PMS products remain highly risky with no regulatory restrictions on sector and stock exposure they take and no overall cap on expenses. Don’t think that the current reforms have done anything to change that.

Source : Live Mint

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