Sebi likely to take action against ‘silent’ PMS companies

The “silence” of many “portfolio management services” (PMS) companies in an out-of-control market has drawn the ire of regulators. A senior Securities and Exchange Board of India (SEBI) official, in a meeting with the PMS industry last week, said they were unable to get in touch with a large number of PMS service providers who were not responding to queries.

PMS houses, usually affiliated with brokerages or asset management firms, handle funds of wealthy investors. Bollywood actors, cricketers, senior professionals and government officials all park part of their wealth with these investment managers.

There are 438 PMS companies registered with the Securities and Exchange Commission, managing assets worth Rs 7,500 crore. However, Manoj Kumar, executive director of the Securities and Exchange Commission, addressing members of PMS industry body APMI, did not quantify the number of companies that were out of touch and had not met basic compliance requirements. Sources told ET that around 100-odd operators fall under this category.

“This is not a good thing. If the regulator cannot reach out to them then one wonders how investors can reach out to them,” a SEBI official said, stressing the need to align the regulator’s list with the members of the newly formed industry bodies.

“Don’t think you will run away with our registration cards. We will chase you and catch you… that is our promise,” Kumar said.

In such a situation, SEBI, concerned about misuse of the seemingly dormant licences, may arbitrarily revoke them or ask the service providers to return them. “There is no point in getting a licence if you don’t comply with it. Lapsed licences are always a concern. You need to be proactive not just in business but also in communications,” a regulator source said.

According to APMI Principal Officer Rasim Baga, 259 of the 438 registered PMS companies are APMI members, managing around 90% of the assets under management (AUM). “APMI is in constant touch with all its members and shares important regulatory communications with the industry at large,” Baga said.

While many of the negligent PMS companies may have dormant books with few or no assets, regulatory concerns may arise from the potential misuse of licenses by non-compliant entities, especially amid strong investor interest in the fast-growing market.

The minimum investment in PMS is Rs 50 lakh, up from Rs 25 lakh in 2019, and a large chunk of the funds are being put into discretionary PMS offerings where investors have no influence over the manager.

“If a PMS firm finds a way to accept funds below Rs 5 lakh from a single investor or pools investments without segmenting client funds or maintaining separate demat accounts for each client, it is a major regulatory violation,” said a senior official at a PMS company. “When a PMS firm pools funds received from various clients in one bank account, it does bookkeeping to segregate contributions from different investors. Under regulations, a PMS provider can never use funds of one client to buy shares in another client’s portfolio,” the person said.

The Securities and Exchange Board, which has formed a specialised team to probe the PMS sector, has collected substantial information from regulated entities, including details of account openings, funds in clients’ names, redemptions, commission, brokerage charges and custody charges. Moreover, the Securities and Exchange Board seeks reaction from fund managers whenever the system raises an alert based on a set of “deviation parameters” set by the regulator. “This could be deviation from the minimum investment of Rs 5 lakh, short selling in cases where the underlying assets are missing or deviation from key regulations,” said an industry insider.

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