Govt notifies first overhaul of the portfolio management services regulations in two decades

Also, Sebi approved an increase in the minimum net-worth requirement for a PMS manager to Rs 5 crore from Rs 2 crore earlier. However, the amount is still dramatically lower than that of mutual funds. An Asset Management Company (AMC) running a mutual fund is required to have a minimum net worth of Rs 50 crore.

Existing portfolio managers have to meet the enhanced requirement within 36 months, Sebi said.

Sebi further said portfolio managers now cannot invest more than 25 percent of their Assets Under Management (AUM) in unlisted securities. The new regulations also state the distributors in PMS should be paid through an 'all-trail' model.

Sebi said, individuals who have passed the NISM Mutual Fund exams or who have an ARN number for mutual funds should be allowed to distribute a PMS until separate norms are formulated for certification of PMS distributors.

Citing different PMS managers adopting different ways to report their performance, Sebi recommended the time-weighted-return method be adopted across the board for PMS managers. Sebi recommended frequency of reporting to clients be increased to every three months from the current six months period.

On performance fees of portfolio managers, Sebi Working Group recommended it to be levied without ‘catch-up basis.’ Catch-up basis is a methodology used to compute performance fees in relation to a ‘high water mark’ — a previously reached value which needs to be subsequently exceeded in order to charge performance fees. The Working Group also proposed a cap of 0.5 percent on ancillary expenses other than brokerage.

PMS in India are governed by the Sebi (Portfolio Managers) Regulations, 1993. PMS emerged as an alternative to mutual funds to high net-worth investors who were willing to take some extra risk for higher returns without being subject to the various investment restrictions on mutual funds imposed by the market regulator.

However, PMS services have suffered from lack of a standardised and easy-to-understanding reporting format and lack of transparency with regard to fees and charges.