Sebi mulls cap on PMS investments in related entities

Mumbai: The Securities and Exchange Board of India (Sebi) may tighten rules on investments by portfolio management service (PMS) firms in group entities. The capital market regulator is likely to limit the exposure of these asset managers, which cater to rich investors, having observed that some entities put client money in associate firms, said people with direct knowledge of the matter.

The current thinking within Sebi is to cap PMS firms' investments in all equity and debt securities of related entities put together at 30%. The regulator might also ask portfolio managers to obtain the consent of clients if the money manager wants to invest in related parties, said the people cited above.

Sebi didn't respond to ET's queries on the issue.


"The 30% cap being considered is at the group level, which means that not more than 30% of clients' funds can be in all related parties put together," said one of the persons cited above. "The PMS manager may not be allowed to invest more than 10-15% of the client's money in a single, related-party entity."

Surge in PMS Investments
The regulator has observed that several PMS firms, especially those promoted by non-banking financial services companies (NBFCs) are deploying client money in the debt securities of the NBFC or equity offerings of other group companies, said the people cited. PMS is an investment avenue for wealthy investors with a minimum investment capability of Rs 50 lakh. Unlike investment structures such as mutual funds or alternative investment funds, the PMS provider doesn't pool the money but enters into a one-on-one agreement with each client. The shares purchased by PMS firms on behalf of the client are held in a separate demat account owned by the client.

Investments through the PMS route have seen a sharp surge in the last two years thanks to the momentum in equity markets during the period. The total assets managed by PMS firms have grown by 30% from Rs 18.5 lakh crore in June 2020 to Rs 24 lakh crore now. During the period, the assets managed by non-discretionary PMSes have nearly doubled from 1.1 lakh crore to 2.1 lakh crore, according to the latest Sebi data.

Some PMS structures allow the managers to invest a fixed part of the client's portfolio in debt and unlisted securities as well. "Currently, there is no restriction on investments in a single issuer, potentially leading to concentration of investments risk for clients and not all investors may consider it suitable," said one of the persons cited above.

Unlike mutual funds and alternative investment funds (AIFs), which impose strict limits on portfolio concentration, PMSes have fewer restrictions.

In a handful of cases, Sebi has observed that portfolio managers were investing in the debt securities of an associate company that were unrated.

There is no definition of related parties and associates applicable for PMS providers. Hence, it is perfectly legal for the portfolio manager to advise clients to invest in related parties. Legal experts said the regulator is expected to define what constitutes a related party and associates.