SEBI Proposed Significant Changes to Portfolio Management System Regulations

Narendra Kumar

10 Feb, 2021

In India, Portfolio Management System is regulated by the SEBI (Portfolio Managers) Regulations, 1993. Due to the investment restrictions on mutual funds imposed by SEBI, High net-worth individuals generally invest via PMS. The products of the Portfolio Management System have always suffered from a lack of standardization, Reporting format, and lack of transparency and other charges levied. The working group of SEBI has proposed PMS regulations on the PMS distributor. The primary objective of the recommendation is to eliminate the effect of extraneous events like deposits and withdrawals. Further, the reporting frequency has changed from every six months to three months.

What is Portfolio Management System?

Portfolio Management is an act of creating an investment account and maintaining the same. The goal is to maximize the investment’s expected return of the individual. 

The key factors of Portfolio Management are-

What are the Types Of Portfolio Management System?

1. Discretionary PMS

In discretionary, the fund manager makes investment decisions on behalf of the investor.

• Non-discretionary PMS

The fund manager suggests investment ideas, while the decision is taken by the client. 

What are the Benefits Availed through PMS?

1. SEBI has brought down the fees and charges on mutual funds as a result PMS distributor has benefited from the high commissions.
2. In mutual funds, Caps on upfront distributor commissions have boosted PMS investments.
3. Due to the advantage over mutual funds, PMS distributors have increased their assets under management (AUM).

Key Factors of the Recommendation made by SEBI

• An increase in the minimum net worth requirement for a PMS manager from Rs 2 crore to Rs 5 crore.
• Time-weighted-return method is adopted across managers.
• Eliminate the effect of extraneous events like deposits and withdrawals.
• Change in the reporting frequency from every six months to three months.
• Changes in investment approach or Principal Officer of the PMS should also be reported to the clients.
• The fees and charges on mutual funds have been brought down by SEBI.
• Enhancing the minimum investment limit from Rs 25 lakh to Rs 50 lakh.
• Market correction in the mid-cap and small-cap has also impacted the PMS products.
• In case of a mutual fund, an Asset Management Company (AMC) running a mutual fund is required to have a minimum net worth of Rs 50 crore.

Issues Covered under the Proposed Amendments to PMS Regulation

1. To Enhance the Qualifying Criteria for employees of Portfolio Manager this should include the Educational Qualification and Work Experience of the employees
2. Enhancement of Capital Adequacy Requirement of Portfolio Manager
3. Product Suitability in Portfolio Management System to minimize the investment threshold for clients
4. Adoption of Investment Approach to get the better results for the clients.
5. Performance Reporting by Portfolio Managers
6. Supervision of Distributors of PMS
7. Reporting and Disclosure Requirements of Portfolio Managers
8. Ease for the potential customers.
9. Rationalization of fees and expenses.

SEBI’S working group observed that different Portfolio Management System managers are adopting different ways to report their performance. To exclude the effect of extraneous events like deposits and withdrawals, the working group recommended that the time-weighted-return method must be adopted by all the managers to maintain consistency and uniformity. Further, the frequency of reporting by the managers to the clients IS increased from every 6 months to every 3 months.

In contrast, the net asset value of mutual funds to be declared on all business days. In addition to it any changes in investment approach or any change in the Principal Officer of the Portfolio Management System should also be reported to the clients. Any change in the system or any update what is reported to the SEBI^[1] should be properly mentioned on the website. Any update or changes in the system that the PMS Manager, they should mention it properly on the website.

Conclusion

The Portfolio Management System manager is allowed only to invest in listed securities. Also, now unlisted securities are permitted. In case of investment in mutual funds, the working group proposed that it should only be allowed to invest in direct plans of mutual funds. PMS services are offered by the wealth manager investing in regular plans and these may have to be restructured.

Suggested Read: Difference Between PMS and AIF