SEBI sounds the death knell for boutique PMS. 

In India, you can manage other people’s money in three ways – Mutual Funds, Alternative Investment Funds and Portfolio Management Service. While much of the world has only two options, Mutual Fund and Hedge Fund, PMS in India was a hybrid way for small fund managers to provide a way to manage the funds of each client in accordance with the needs of the client.

Of course, most PMS doesn’t really operate in that way. Rather every client regardless of his risk appetite is sold the same portfolio of stocks. In other words, PMS have become more like a Mutual Fund and one that suffers from tax disadvantage as well.

Few months back, SEBI constituted a Working  Group to review the SEBI (Portfolio Managers) Regulations. The SEBI board yesterday met and approved the suggestions. Key changes are

1. Networth of the PMS firm is now raised to 5 Crores vs 2 Crores earlier
2. Clients now have to invest a minimum of 50 Lakhs vs 25 Lakhs earlier.  
3. Custodian is now compulsory for all PMS. Earlier, you could have managed upto 500 Crores without the need for a Custodian
4. The fund manager now has to have a professional qualification in finance, law, accountancy or business management

In recent years, PMS’s have taken off with total assets under management crossing 140K Crores with more than 350 PMS in operation. The new changes, especially with regard to the minimum amount is bound to have an impact on the growth going forward.

The intention for all changes by SEBI is to safeguard  the interest of investors. But the recommendations that are now applicable will reduce competition and actually hurt the interests of the clients.

In the United States, you can start your own mutual fund relatively easy. The cost of starting a mutual fund ranges from around 20 Lakhs to 80 Lakhs. In India, you need a networth of 50 Crores to start a Mutual Fund.

While the regulations for PMS aren’t as stringent compared to say stock brokers, we haven’t seen any PMS running away with clients money. On the other hand, you have multiple brokers who have vanished with crores of client money.

To avoid small investors from getting burnt in derivatives, SEBI has from the start taken a stand that the minimum size of the contract will be high. This was recently enhanced to an even higher level. But dig a bit deeper and you shall find that this has led to more clients losing more money than being saved. 

Another rule that is now applicable and makes no sense is the requirement for a professional degree. Once again, there is no correlation to show that just because I have a professional degree in law, can I also be a great fund manager. But the higher powers seem to believe that.

A CFA certification in my opinion has a far greater value than a Management Degree since the focus is totally on understanding companies, their Balance Sheet and the ability to spot frauds and inconsistencies. Moreover, being international in reach, it ensures that the fund manager follows the best global practices.

The current move while not totally surprising is a retrogressive one. There are various ways in which SEBI could have safeguarded investor interests while at the same time provided for more choices. Sadly, once again we have missed that boat.

Links: Issuance of SEBI (Portfolio Managers) Regulations, 2019