Sebi mulls hiking minimum ticket size for investment in PMS schemes

Minimum ticket size of Rs 2.5 million not adequate to discourage retail investors; 2- or 4-fold increase on the anvil

The Securities and Exchange Board of India (Sebi) is considering doubling or even quadrupling the minimum ticket size for investment in portfolio management services (PMS) schemes.

The regulator is worried about the current investment limit of Rs 2.5 million may be inadequate to prevent retail investors from using this route. Investors without sufficient knowledge of the risks that accompany investment in PMS schemes could end up burning their fingers if there was a sharp correction in Indian equities.

Indeed, several PMS schemes had seen sharp erosion in their portfolios after the recent correction in mid- and small-cap stocks. Despite recent recovery, the BSE MidCap and BSE SmallCap indices are still down 7.5 per cent and 12.2 per cent, respectively, in the year-to-date.

“Sebi believes the current cap is too small and could potentially endanger the savings of retail investors,” said a person familiar with the matter.

Under PMS, portfolio managers offer customised investment advice to clients, typically high net worth individuals. The previous entry limit for PMS was half a million and was raised fivefold in 2012.

“Sebi has been contemplating raising the investment limit to either Rs 5 million or Rs 10 million for a while now. In all probability, they will want to bring the PMS ticket size on a par with that of alternative investment funds (AIFs),” said another person in the know.

He added that the regulator had not made up its mind on the issue but industry players, especially those with an AIF license, had informally endorsed the regulator’s stance. The minimum ticket size for AIFs stands at Rs 10 million.

PMS assets have nearly doubled in the past five years to Rs 14,756 billion. A large portion of this money is in discretionary schemes, wherein the portfolio manager manages the funds of each client according to the client’s needs.

PMS run a more concentrated portfolio of 15-20 stocks, compared with equity schemes of mutual funds (MFs), which generally invest in 40-60 stocks. A concentrated portfolio increases the potential of higher returns but adds to the risks.

While equity MFs typically charge between 2-3 per cent in expense ratios, fixed fees for PMS vary between 1-2.5 per cent. The latter, however, typically charge additional fees on a profit-sharing basis, which translates into better yields for the service provider.

The greater worry, say experts, is the lack of transparency. “PMS managers often do not tell you what they are buying or when they are buying it. What’s more, these are often boutique shops run by two or three people,” said the second person quoted earlier.

In 2007, several PMS schemes compromised on quality to generate alpha by investing in mid- and small-cap stocks. This caused the PMS portfolios to go into a tailspin after the market crashed in 2008 and it became difficult for portfolio managers to exit some of these stocks because of poor liquidity and the quantum of holding. A lot of PMS outfits shut shop between 2008 and 2013 after seeing years of continuous net outflows.

This upheaval had forced the market regulator to tighten PMS regulations. In 2008, it banned the pooling of PMS assets, wherein fund managers pool investments from clients and invest on behalf of the whole group. In 2010, the regulator mandated that profit-sharing or performance-related fees should be charged on the basis of a ‘high watermark principle’ over the life of the investment. This means if the portfolio value declines and then recovers, the manager does not earn fees till all the losses have been made up. In 2012, Sebi raised the minimum ticket size.