Sebi likely to take action against ‘silent’ PMS companies

The “silence” of many “portfolio management services” (PMS) companies has raised concerns among regulators in a buzzing market. The Securities and Exchange Board of India (Sebi) is unable to reach out to a large number of PMS service providers who are not responding to enquiries, a senior Sebi official said at an interface with the PMS industry last week.

Typically subsidiaries of brokerage firms and asset managers, PMS houses manage money for wealthy investors, including several Bollywood actors, cricketers and top professionals, as well as government officials, who entrust a portion of their wealth to these investment managers.

There are 438 PMS companies registered with Sebi that manage assets worth ₹7.5 lakh crore. Manoj Kumar, Sebi’s executive director who addressed members of PMS industry body APMI, however, did not quantify the number of companies that remain unreachable and thus fail to meet basic compliance requirements. Sources told ET that around 100 operators fall into this category.

“This is not a good thing… If the regulator is not able to reach them, we wonder how investors can reach them,” the Sebi official said, stressing the need to reconcile the list available to the regulator with the members of the newly formed industry association.

“Don’t think that you will take our registration card and run away. We will chase you and catch you… that is our commitment,” Kumar said.

In such circumstances, Sebi, concerned about possible misuse of an apparently dormant licence, can either take an ex officio decision to cancel the licence or ask the service provider to surrender it. “There is no point in taking a licence and not complying. Any dormant licence is always a cause for concern. One has to be active not only in business but also in correspondence,” a regulatory source said.

According to Rashim Bagga, APMI’s Managing Director, 259 of the 438 registered PMS entities are APMI members, which manage approximately 90% of the assets under management (AUM). “APMI remains in constant contact with all its members and shares important regulatory communications with the entire industry,” Bagga said.

Although many bankrupt PMS companies may have dormant books representing little or no assets, regulatory issues may arise due to potential misuse of the license by a non-compliant entity – particularly in a context of intense investor interest in a booming market.

The minimum investment in a PMS is ₹50 lakh, up from ₹25 lakh in 2019, with most of the money being invested in discretionary PMS offerings where investors cannot influence the manager.

“If a PMS entity finds a way to accept less than Rs 50 lakh from a single investor, or does any pooling of investments without segmenting the clients’ money or maintaining a separate demat account for each client, it would be a clear violation of the regulations,” a senior PMS company official said. “When a PMS company pools money received from various clients in a single bank account, it does accounting to segregate the contributions of different investors. Under the regulations, a PMS provider cannot use one client’s money to buy shares for another client’s portfolio under any circumstances,” the person said.

Sebi, which has formed a dedicated team to review the PMS sector, collects a considerable amount of information from regulated entities — such as account opening details, funds deposited in a client’s name, redemptions, charges, brokerage and custody fees, among others. In addition, Sebi seeks responses from fund managers whenever the system generates alerts based on a series of “deviation parameters” defined by the regulator. “This could be deviation from the minimum investment of ₹50 lakhs, or any short position if the underlying is missing, or variations from key regulations,” the industry official said.

The regulator also sent a strong message to the industry that a handful of service providers should not dictate the agenda for the entire PMS sector, which has diverse membership types.