The Securities and Exchange Board of India (Sebi) has proposed to raise the minimum investment limit in portfolio management services (PMS) and alternative investment funds. It also wants stringent disclosure norms for investment options that high net worth investors (HNIs) go for.
The minimum investment limit in PMS, now capped at Rs 5 lakh, will be raised to Rs 25 lakh. In other alternative investment funds, like art funds and collective investment schemes, it will be raised to Rs 10 lakh. Sebi is hoping the higher limits will discourage retail investors, as these schemes are riskier compared to conventional investing. Also, retail investors are not knowledgeable enough to understand their complexities.
Typically, PMS schemes aim to offer 3-4 per cent higher returns than equity markets. The average compounded annualized return from PMS schemes in the last four years has been around 16 per cent. That from large-cap mutual funds has been 11-17 per cent.
Till now, there were no comprehensive guidelines governing venture capital funds, hedge funds, real estate, private equity (PE), debt, private investment in public equity, infrastructure, social venture, strategy and small and medium enterprise funds. Now, all of these will have to register with Sebi.
For an industry that has had a free run in choice of sector and companies, new restrictions are on the way. Now, it will not be able to buy stake in listed firms that are not part of any index.
While the restrictions will limit the fund’s flexibility, it will mean more empowerment for the investor. Along with banks and institutions, HNIs also invest in PE funds. Currently, disclosure levels, both by PMS and PE funds, are low, with investors being unaware of where and how their money is being invested. Investors receive account statements in three to six months. PE funds may choose to disclose the value of the portfolio in six months.
Now these funds will have to make more disclosures. Thus, investors will be making more informed decisions, whether to stay with or exit the fund. To exit a PE fund, it must be listed, or someone should buy out stake. To exit a PMS, however, one would have to pay an exit load (only in the initial year), in the range of one to two percent.
According to Bain & Company, the total deal size in venture capital, infrastructure private equity investments and real estate investments in India, last year, was $9.5 billion.
