Confusion over new rules on standardised return metrics for PMS players

Service providers are looking for clarity on how standardisation should be approached and are seeking Sebi's advice on the matter

The move to provide standardised returns across portfolio managers may be experiencing some teething troubles. Lack of granularity in the regulations has some portfolio management services (PMS) providers scrambling to figure out how they should showcase returns, said three people in the know. This included a portfolio manager, a distributor, and a service provider to the industry.

They are looking for clarity on how it should be approached and are in the process of seeking advice from the Securities and Exchange Board of India (Sebi) on the matter, said industry sources.

The move follows the publication of the revised portfolio manager regulations last month. It seeks to change how portfolio managers are governed, increasing the minimum investment size to Rs 50 lakh, and warranting a minimum networth for PMS players from Rs 2 crore to Rs 5 crore.  It also made changes to the way returns are shown.

 “…the performance of a discretionary portfolio manager shall be calculated using time-weighted rate of return (TWRR) for the immediately preceding three years and in such cases, performance indicators shall also be disclosed,” said Sebi (Portfolio Managers) Regulations, 2020.

A service provider said there was more than one way in which TWRR could be calculated. Clarity on the methodology can ensure marginal kinks are ironed out. “We want to make sure there is no decimal point difference. You want to compare apples to apples,” said one person.

Another person said a working committee report on the matter had mentioned a uniform format. Sebi could operationalise it through a circular, so there is no scope for creative interpretation that may favour certain providers. “Sebi should come out with a template. That will ensure the confusion is taken care of,” said a second person.

The report had noted the multiplicity of reporting standards that exist for PMS providers. “Currently, there are wide divergences across PMS providers with regard to the way performance is reported to existing clients, prospective clients, and to Sebi. Non-standard reporting formats make it difficult for prospective clients to compare the performance of PMS providers and make informed decisions with regard to the choice of their PMS provider,” the report had said.

An email sent to the regulator did not elicit a reply.

Ashish Shanker, associate director and head (investments), Motilal Oswal Wealth Management, said most of the larger players have returns that are largely comparable. It is the smaller ones that may be more affected by the transition, he said. “I think it’s good for customers because you’ll get standardised data,” said Shanker.

Virendra Jain, founder, Midas Touch Investors Association, said Sebi could help investors decide by collating the returns data better. It is not currently possible to easily obtain information which would point to the best performing fund managers, based on the data and the way it is being made available on the regulator’s website, said Jain.  

Improving the ease of comparison of this collated PMS returns data on the regulator’s website can help the customer better, said Jain.

Roadblocks

• Lack of granularity in regulations has left PMS providers wondering how to showcase returns

• Industry has approached Sebi, seeking clarity on norms

• Move to provide standardised returns follows revised PMS guidelines issued last month

• New regulation seeks to change how portfolio managers are governed, raising minimum investment size to Rs 50 lakh and warranting minimum net worth of Rs 2-5 crore

• Working committee report on the matter had noted the multiplicity of reporting standards that exist for PMS providers