The stock market regulator, Securities and Exchange Board of India (SEBI) has been itching to streamline operations of portfolio management services (PMS) after following the soft-touch regulatory policy for a long time. Apparently, it has been stung by the uninformed criticism of its passivity and galvanised into action. The new guidelines are as per the SEBI’s circular titled – ‘Performance Benchmarking and Reporting of Performance by Portfolio Managers’ dated December 16, 2022 coming into force from 1st April 2023. The guidelines deal with the selection of benchmarks, standardising the reporting of fund performance and valuation of assets held.
The portfolio managers in India are accordingly not allowed to disclose any model portfolio returns or the performance of one or more cherry-picked portfolios in any communication to their clients both actual and wannabe. This is unexceptionable as PMS is tailor-made and customised as per individual requirements of clients. Indeed, this distinguishing feature of PMS vis-à-vis mutual fund investments argues for regulators laying off and not resorting to regulatory overkill. Thus, one is surprised to find SEBI now mandating disclosure of the relative performance of their investment approach in all the marketing material – 1) performance relative to the selected benchmark; and 2) performance relative to other portfolio managers within the selected strategy.
For benchmarking purposes, SEBI mandates the Association of Portfolio Managers of India (APMI) to prescribe a maximum of three benchmarks for each strategy such as ‘equity’, ‘debt’, ‘hybrid’ and ‘multi-asset’. For each strategy, the portfolio manager must select one benchmark, which must reflect the core philosophy of the strategy. This one-size-fits-all approach flies in the face of the reality that PMS is strictly speaking not a scheme but covenant between the fund manager and client. In other words, unlike mutual fund schemes, PMS is not a collective investment scheme.
To be sure, there have been reports of dubious practices being resorted to by PMS service providers like front running, not heeding the advice of the client, going ahead with investments and disinvestments without confiding in the clients and using the general power of attorney to do pretty much what they please. But then, the clients are not greenhorns or poor investors. That they place a hefty minimum of Rs 50 lac at the disposal of the PMS manager gives rise to the presumption that they have the resources to take care of their investments. If they have been slack in this regard, they have only themselves to blame. In other words, clients must use their independence to enter into a watertight contract preferably taking the help of their lawyers. Such tailor-made covenants should provide for prior consultation, even approval mandatory for major decisions specified in the contract. PMS entice HNI with promise of minimum returns over a long term which incidentally also happens to be the lock in period. They therefore resent clients snapping at their heels every step of the way on the ground that denies them the much-needed freedom to realise the long-term goals for their clients. This conflict of interest between the two is at the heart of their unique relationship.
But then an assertive client does not take things lying down. Often bold clients abroad, do the bidding of the PMS manager only if he can show that he has done the same with his own personal money. Insistence on having skin in the game or eating the food you cook is the answer. SEBI incidentally has shown the way by making fund managers of mutual funds have skin in the game The short point is the SEBI has missed the wood for the trees----it has gone overboard forgetting that PMS and mutual fund investments are as different from each other as cheese is from chalk. Instead of agonising over the safety of money of the well-heeled HNIs, SEBI should spend its amenities on safeguarding the laity who are taken for a royal ride by wily and rapacious promoters at the primary market. Primary market reforms, mutual funds reforms and ridding the secondary market from the menace of insider trading should be on the top of its agenda. SEBI has done well to phase out buyback through markets. It should do more and bat for the small investors. HNIs can take care of themselves. They pay a lot more to the fund managers by way of fees and commission for getting personalised service and therefore should not sign on the dotted lines.
—The author S Murlidharan
is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed in the article are personal.
Read his previous articles here
(Edited by : CH Unnikrishnan)
First Published: Dec 22, 2022 11:07 AM IST
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