SEBI revises norms for portfolio managers

The portfolio management services (PMS) industry has witnessed robust growth of 18% CAGR (compound annual growth rate) in the past five years, with assets under management (AUM) rising to ₹13.7 trillion (US$183.86 billion) from ₹6.04 trillion.

Further, disruptions in the market, including technological advances, have affected the core portfolio selection, management and distribution side of the industry. In view of the rapid growth of the industry and the challenges that come along with it, the Securities and Exchange Board of India (SEBI) constituted a working group to review the SEBI (Portfolio Managers) Regulations, 1993 (former PMS regulations).

The recommendations of the working group were taken into account in overhauling these regulations and formulating the SEBI (Portfolio Managers) Regulations, 2020 (2020 PMS regulations), to revise and standardize norms and catch up with certain limits and requirements.

Following are key highlights from the 2020 PMS regulations, notified on 16 January 2020, and the Circular on Guidelines for Portfolio Managers dated 13 February 2020, which will apply from 1 May 2020.

Net worth requirement

The minimum net worth required for portfolio managers has been increased from ₹20 million to ₹50 million. A grace period of three years has been afforded to presently registered portfolio managers to increase their net worth. While it is intended to curb dubious operators, this may restrict players who fulfill other eligibility criteria, but do not meet the high-net-worth threshold.

The minimum investment amount per client has been increased from ₹2.5 million to ₹5 million. This may be beneficial, as small savers can be prevented from taking exposure in PMS that carry higher risks, such as concentration risk, illiquidity, and a wide investment mandate. However, it is anticipated that this may slow down the growth of the PMS industry.