Shift portfolio management operations to subsidiary, RBI tells SBI

SBI's subsidiary SBIFMPL is the fourth-largest asset manager in India and caters to HNIs along with domestic and offshore investors

The Reserve Bank of India (RBI) has directed the State Bank of India (SBI) to stop the portfolio management operations under its fold and shift it to a subsidiary by March 2019, in an attempt to avoid conflict of interest.

This comes after the RBI had flagged regulatory concerns and conflict of interest, following which SBI Capital Markets, the merchant banking subsidiary of SBI, decided to stop providing project advisory and structured finance services to private sector entities. SBI has begun the process of restructuring SBI Caps, following concerns raised by the RBI.

Following the RBI’s diktat, SBI, the largest retirement benefit fund manager in the country, has secured board approval earlier this year to shift the portfolio management services (PMS), offered through its treasury division, to SBI Funds Management (SBIFMPL).

The SBI’s board has “approved closure of PMS activity” by transferring its existing client portfolio to SBIFMPL, according to documents reviewed by Business Standard.

The SBI’s total assets under management stood at Rs 4.5 trillion at the end of financial year 2017-18. Among a dozen clients, it has been managing funds for Employees’ Provident Fund Organisation (EPFO) since 1995. It manages 35 per cent of the EPFO’s corpus of over Rs 10 trillion, which are retirement savings of formal private sector workers.

In a bid to ensure SBI doesn’t lose its key business, its Chairman Rajnish Kumar wrote to the EPFO Central Provident Fund Commissioner Sunil Barthwal on August 31 to transfer SBI’s portfolio management business to SBIFMPL entirely.

“The RBI has in the past advised us to discontinue providing such (portfolio management) services to our clients and shift such business to our subsidiaries. Recently, the RBI has again reiterated its stand in the matter and asked us to migrate our PMS services by March 31, 2019, to our subsidiary or any other fund manager,” Kumar wrote in the letter. He maintained that “all transactions for the fund are done at arm’s length from our own operations at the treasury.”

For the time being, the EPFO will either allocate the corpus held by SBI to its other four portfolio managers (UTI Asset Management Company (AMC), ICICI Securities Primary Dealership, Reliance AMC, and HSBC AMC) or allocate the entire corpus of SBI to UTI. The decision will be taken by the EPFO’s Central Board of Trustees, chaired by Labour and Employment Minister Santosh Gangwar, which is set to meet on Tuesday.

The investment division of the EPFO is in favour of transferring the SBI’s share to UTI AMC, given its best performance in handling the corpus since July 2015.

“The issue of appointment of SBIFMPL on nomination basis, as requested by SBI, may be taken up at the time of selection process of new portfolio managers through a competitive bidding process,” the EPFO said in the agenda of the meeting.

The tenure of all portfolio managers of the EPFO is set to expire on December 31. However, the EPFO trustees are expected to extend their terms till June next year.

The SBI’s other clients include Delhi Vidyut Board Employees’ Terminal Benefit Trust, Coal Mines Provident Fund Organisation, Seamen’s Provident Fund Organisation, the superannuation funds of SBI, among others.

Till 1995, the RBI was managing the investment corpus of EPFO, following which SBI solely managed the funds from 1995-2008. The EPFO appointed multiple portfolio managers in 2008 to introduce competition in fund management.

SBI’s subsidiary SBIFMPL is the fourth-largest asset manager in India and caters to high net worth individuals along with domestic and offshore investors. It manages assets of over Rs 2.8 trillion.