Portfolio management services in India

(Ananta Prasad mohapatra)

Introduction-

If you have the money but no time or skills to build and manage your investment
portfolio, PMS is an option you can definitely consider. PMS, as it is popularly known, is
offered by most brokerages and asset management companies in India. Professional
managers handle your money and spread your investments across equities, bonds and
even mutual funds to fit your personal investment goals and risk appetite. As per SEBI
guidelines, only those entities who are registered with SEBI for providing PMS services
can offer PMS to clients. There is no separate certification required for selling any PMS
product. PMS have equity and debt options. Earlier, they used to offer real estate,
unlisted shares and structured products options as well, but now these come under the
Alternative Investment Fund (AIF) category and are managed according to the market
regulator's separate regulations on AIF. . PMS are offered by banks, brokerages,
independent investment managers and asset management companies.

PMS were a big hit before the 2008 market crash but faced accusations of misuse.
Many were not registered and indulged in heavy churning. After that, the Securities and
Exchange Board of India, or Sebi, introduced stringent regulations. Among other things,
it raised the minimum investment limit from Rs 5 lakh to Rs 25 lakh. It also banned
pooling of accounts of different investors.

1.Types-

1.1. Discretionary PMS – Where the investment is at discretion of the fund manager
& client has no intervention in the investment process.

1.2. Non-Discretionary PMS – Under this service, the portfolio manager only
suggests the investment ideas. The choice as well as the timings of the investment
decisions rest solely with the investor. However the execution of the trade is done by
the portfolio manager.

1.3Advisory PMS- There is a very thin line of difference between advisory and non-
discretionary clients. Non-discretionary services are the ones in which managers involve
the client in the decision making process. Non-discretionary clients are usually
institutional clients such as pension funds, insurance companies, high networth
individuals, etc. Advisory services are the ones where managers advise their clients
about investing.

Majority of PMS providers in India offer Discretionary Services.

2.CREATION-

For registration as a portfolio manager, an applicant is required to pay a non-refundable

application fee of Rs.1 lakh, have a minimum networth of Rs. 2 crores, pay Rs.
10 lakhs as registration fees at the time of grant of certificate of registration by SEBI
and pay Rs. 5 lakhs to SEBI after every three years as renewal fees. . SEBI (Portfolio
Managers) Regulations, 1993 provides for the regulation of PMS in India.

Governance- The services of a Portfolio Manager are governed by the agreement

between the portfolio manager and the investor. The agreement should cover the
minimum details as specified in the SEBI Portfolio Manager Regulations.

Portfolio manager cannot offer/ promise indicative or guaranteed returns to

clients.
Portfolio manager can only invest and not borrow on behalf of his clients.
Portfolio managers cannot impose a lock-in on the investment of their
clients. However, a portfolio manager can charge exit fees from the client for
early exit, as laid down in the agreement.

The grievance redressal and dispute mechanism is also mentioned in the Disclosure
Document. Investors can approach SEBI for redressal of their complaints. On receipt of
complaints, SEBI takes up the matter with the concerned portfolio manager and follows
up with them.

3.Client documentation-

 Execution of Discretionary Portfolio Management Services Agreement

 Bank and Depository Account opening forms- to open separate and individual
bank and depository accounts for each client
 Power of Attorney – to be issued by client in favour of PMS AMC to operate the
bank and depository accounts on behalf of the client
 Disclosure Document – to understand AMC as Portfolio Manager and its services.
 PMS Client Registration Form- to `Know your Customer

4.Working- The investor and the portfolio manager enter into an agreement detailing
the investment strategy, goals and other details. The investor can offer either a sum of
up to Rs 25 lakh or stocks worth this much. , the manager takes investment decisions
and has the power of attorney to manage the investor's demat account
Each PMS account is unique and the valuation and portfolio of each account may differ
from one another. Every PMS scheme has a model portfolio and all the investments for
a particular investor are done in the Portfolio Management Services on the basis of
model portfolio of the scheme. However the portfolio may differ from investor to
investor. Some of the reasons are-

 Entry of investors at different time.

 Difference in amount of investments by the investors
 Redemptions/additional purchase done by investor

 Market scenario
 size of portfolio
 taste of investor
 model of portfolio,such as large cap,mid cap

There is no NAV for a PMS scheme; however the customer will get the valuation of his
portfolio on a periodic basis from the PMS provider. The client has right to obtain details
of his portfolio from the portfolio managers.

The portfolio manager shall furnish periodically a report to the client stating the
composition of portfolio,description of securities,number and value of each security,cash
balance,aggregate value of portfolio,transaction etails,details of interest,dividend,bonus
share,right share received,expenses incurred for management of portfolio,details of risk
foreseen etc.

5.Portfolio Management Services (PMS) Charges

SEBI Portfolio Manager Regulations have not prescribed any scale of fee to be charged
by the portfolio manager to its clients.

However, the regulations provide that the portfolio manager shall charge a fee as per
the agreement with the client for rendering portfolio management services. The fee so
charged may be a fixed amount or a return based fee or a combination of both.
There is no uniform fee structure for PMS as it varies across brokerages and investment
slabs. For instance, Motilal Oswal Securities charges an upfront fee of 1 per cent and
fixed management fee of 0.75-1.5 an cent of your assets under management across
slabs.
There is also a performance-based fee of 10 per cent profit sharing on high
watermarking basis. High water mark charges means that the performance fee only
applies to net profits, after having recovered losses if any in the previous years.

Geojit BNP Paribas offers two fee options.

The first entails 3 per cent an annum charged @0.75 per cent at the end of every
quarter and the second, 1 per cent an annum, charged @0.25 per cent at the end of
every quarter plus a performance fee of 20 per cent on gains over and above the 12
per cent an annum hurdle rate.

Appraisal- While many PMS providers offer standardised portfolios, some offer
investments that are geared to meet clients' specific goals
The performance of PMSwill not be in public domain. For PMS, you will have to take the
provider's word. This is because different PMS clients have different objectives and
want different strategies. However, it is easy to get a performance report card in case
of a model PMS portfolio. Go with well-known and trusted names only. Make it a point
to compare notes on the fee structure and performance record and insist on meeting
the portfolio manager (team or representative) for a better perspective before you
decide on one.

Also speak to existing clients about performance and service levels.

6.PMS VS MUTUAL FUND -

PMS' closest competition is mutual funds. Both differ in terms of working, fee, Sebi
regulations and risk-reward profile. Mutual funds also promise a long-term wealth
creation opportunity. But while they do operate on similar lines,

Portfolio Management Services and Mutual Funds: The Differences

Features PMS Mutual Fund

Management Provide ongoing, personalized Provide access to professional
access to professional money money management services
management services

Customization portfolio can be tailored to Portfolio structured to meet the

address each investor's specific fund's stated investment objectives
needs
(Non Discretionary)
Ownership Investors directly own the Shareholders own shares of the fund
individual securities in their and cannot influence buy and sell
portfolio, allowing for tax decisions or control their exposure to
management flexibility incurring tax liabilities

Liquidity Although managers may hold Mutual funds generally hold some
cash, they are not required to cash to meet redemptions
hold cash to meet redemptions

Minimums Significantly higher minimum Provide ongoing, personalized access

investments than mutual funds. to professional money management
As SEBI Rules minimum services
investments is Rs 25 Lacs.

Flexibility Generally more flexible than mutual funds. The Comparatively less
Portfolio Manager may move to 100% cash if flexible
required. The Portfolio Manager may take his own
time in building up the portfolio. The Portfolio
Manager can also manage a portfolio with
disproportionate allocation to select compelling
opportunities

Publicity Not in public domain Performance is

displayed in website

Monitoring No sufficient monitoring and regulation Well monitored and

PMS do not have this limitation. regulated
 Big investment in a promising company is possible
Holding that mutual funds
cannot hold a big stake
in a company even if it
is a very good
investment.

taxation Treated as business income Tax free if equity base

is 65%+

7.Tax treatment-

Any income from Portfolio Management Services account is a business income. (i.e
slabwise).

Profit can be considered as Capital gains. [STCG(15%) or LTCG(Taxfree)]. It depends

on clients Chartered Accountant or the assessing officer how he treats this Income. The
PMS provider sends an audited statement at the end of the FY giving details of STCG
and LTCG, it is on the client and his CA to decide to treat it as capital gain or business
income.

8.CURRENT SCENERIO-

REPORT OF PORTFOLIO MANAGERS - AS on November 30, 2013

PMs reported for the month - 231
Non-
Discretionary Advisory
Discretionary
No. of Clients 43458 5098 9431
AUM (Rs. in crore) 128193.42*
Listed Equity 17025.37 5187.34
Unlisted Equity 1442.32 72.24
 Plain Debt 505911.81 22575.81
Structured Debt 658.38 605.70
Equity Derivative 118.54 -2.44
Mutual Fund 3164.65 5925.52
Others 14314.13 312.71
Total 542635.2# 34676.87

Notes:
1. *Value of Assets for which Advisory Services are being given.
2. #Of the above AUM Rs.505024.80 crore is contributed by funds from EPFO/PFs.
3. The above data is based on the monthly reports received from portfolio
managers.
Source-sebi annual report-2013

8.Growth of PMS in India

Table 1

portfolio growth
FY manager rate in%
1993 28
1994 40 42.86
1995 61 52.50
1996 13 -78.69
1997 16 23.08
1998 16 0.00
1999 18 12.50
2000 23 27.78
2001 39 69.57
2002 47 20.51
2003 54 14.89
2004 60 11.11
2005 84 40.00
2006 132 57.14
2007 158 19.70
2008 205 29.75
2009 232 13.17
2010 243 4.74
2011 267 9.88
 2012 250 -6.37
average growth
rate 19.16
SOURCE-HANDBOK OF STAT,SEBI-2012

In the year 1992-93, the no of portfolio managers were just 18.It took more than 11
years to reach the number 60 representing more than 100% growth.Growth was more
quick when no of portfolio managers touched to 132 in 2006 within a span of 5
years.Now in 2012 financial year end,there are 250 registered portfolio managers
according to sebi.Average growth rate works out to be 19.16% in all these years.This
trend is shown below with help of chart.

Figure 1

Year vs No. of Portfolio Manager

300
N
o
. 250
o
f
P 200
o
r
t
f 150
o
l
i
o 100

M
a 50
n
a
g
e 0
r
93 994 995 996 997 998 999 000 001 002 003 004 005 006 007 008 009 010 011 012
19 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2
YEAR

Source-self compiled

Conclusion-

To conclude, PMS isn't as monitored and regulated as mutual funds.It is far reach for a
common or retail investor till today though it is a good option to be considered by
HNI.In terms of category,most investors prefer to discretionary portfolio
services.Consistent increase in no of portfolio managers and their average annual
growth rate shows a positive symbol to stock market in India.

Ref-1)http://www.tflguide.com/2011/03/portfolio-management-services-in-india-
pms.html

2) SRIVIDHYA SIVAKUMAR, Portfolio management service, a smart option,The Hindu

Businessline, published on December 10, 2011

3)http://www.angelbroking.com/Services/PMS-Faq.aspx accessed on6/1/14

4)Brijesh Baranwal, Published in Shares & Stock, 2011 on 07 November 1 Portfolio

Management Services (PMS) in India, www.caclubindia.com

5)SEBI-FAQ ON PMS

6)SEBI ANNUAL REPORT-2013

6)HANDBOOK OF STAT-2012