Portfolio management under Sebi scanner

The Securities and Exchange Board of India (Sebi), after tightening the norms for the mutual fund industry, is now looking at portfolio management services. The market regulator will soon be coming out stricter and comprehensive guidelines for PMS.
According to a senior banker with a leading foreign bank that offers wealth management and portfolio management services, Sebi has been in dialogue with several service providers to get their views on making the services more transparent and investor-friendly. "We have been deliberating with the regulator and it should be coming out with guidelines in the coming few weeks," the executive said on the condition of anonymity.
Earlier, a senior Sebi official has mentioned the watchdog is indeed looking at all areas for making things transparent and investor-friendly. According to industry sources, there are several aspects that the regulator is looking at and one important aspect is the PMS fees.
There are no restrictions now on fees charged by service providers. However, since the market is competitive, rates remain reasonable. "But there are instances of fee structures changing with the market trend. During the boom of 2007-08, some charged atrocious fees, and there were also some handsome profit sharing agreements," says a Mumbai-based broker. Hence, the regulator is expected to cap the fees charged by portfolio managers.
This, however, might not go down well with the 229-odd portfolio managers registered with Sebi. But rthe regulator isn't much worried about that. "In 1992, when we had asked brokers to disclose the fees they charge to clients, there was an uproar, and trading closed for four days, however, they had to comply and things are much better now," said the Sebi official.
Generally, portfolio managers have three schemes, one where a flat fee of around 2% of the portfolio amount is charged, and the service provided includes investment advice at regular intervals and managing the portfolio. The second scheme includes a fixed fee and a profit-sharing scheme, the latter usually kicks in when a return over the government bond (risk-free return) rate is crossed. Then, there is the totally variable scheme where the manager charges a total variable fee structure based on profit sharing.
The first two are said to be the more popular, and the third variety usually gains ground when the market is booming and is offered to high-ticket clients.
The norms are also expected to cover the 'wealth management' area. There are no specific norms now for this burgeoning industry that has several service providers like banks, brokers, financial service firms and individuals. Sebi has applied to the finance ministry to extend the definition of the term 'securities' in the Sebi Act to several instruments, especially alternative investments like those in art and several structured products that usually beat the definition and thereby the Sebi purview. Wealth managers are known to offer such products to their clients and there is usually an issue in the valuation of these instruments, noted a banker. They don't want a Madoff- like situation happening in India where exotic products are peddled to wealthy clients under Ponzi schemes, he adds.
The market size of PMS is estimated to around Rs 1 lakh crore. Sebi has been tightening the PMS norms over the years. In May 2008, Sebi had increased the networth requirement for portfolio managers from Rs 50 lakh to Rs 2 crore and also asked the portfolio managers not to pool accounts of clients. Pooling of clients would mean portfolio managers becoming quasi-mutual funds, not giving customised services.
On June 23, 2009, Sebi clarified that there should be a clear segregation of each client's fund through proper and clear maintenance of back-office records. It also mentioned that portfolio managers were not allowed to use funds of one client for another client. Portfolio managers will also have to maintain an accounting system containing separate client-wise data for their funds and provide statement to their clients for such accounts at least every month. Importantly, managers will have to reconcile client-wise funds with the funds in their bank account every day.

Transparency drive

#Sebi likely to set limits on fee charged by PMS providers

#Guidelines may cover 'wealth managers' as well

#Alternate assets like art, structured products under lens

#Emphasis on reporting asset position and charges likely

#Has already ordered separate client accounts and statement

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Advantage BSE in block deals

The Bombay Stock Exchange (BSE) has widened its lead over the National Stock Exchange (NSE) in the block deal segment.
In 2008, the volume of block deals on BSE was Rs 16,377 crore, compared with NSE’s Rs 4,754 crore. The corresponding numbers for the previous year were Rs 15,180 crore and Rs 8,509 crore, respectively.
A block deal is a trade with a minimum quantity of 500,000 shares, or with a minimum value of Rs 5 crore through a single transaction window on the bourses.
Market experts attribute the high volume of block deals on BSE to low trading volumes in the cash market. This leads to more execution of block deals. BSE sees an average daily trading volume of Rs 3,000 crore in the cash market compared to Rs 7,000-8,000 crore on NSE.
Jagannadham Thunuguntla, chief executive officer of SMC Capitals, said since BSE in general has lower trading volumes than NSE, chances of spillover of a block deal are much less. This means deals can go through faster on BSE.
“On NSE where trading volumes are much higher, trading is done on a first-come-first-serve basis. So lesser number of trades gets entirely executed at one time,” added Thunuguntla.
However, things could be improving for NSE. Since January 2009, there have been six block deals on the exchange with a total volume of Rs 232 crore compared to four deals with Rs 56 crore volumes on BSE.
The situation is almost the same in case of bulk deals. While transaction in the bulk deal segment of BSE amounted to Rs 70, 657 crore in 2008, it was Rs 65,752 crore on NSE. A bulk deal takes place when 0.05 per cent of equity shares of a company listed in the exchange is transacted.
In aggregate terms, block deals have seen a dip of 11 per cent in 2008, compared to 2007. Even the number of trades has dropped 30 per cent. That is, there were 411 block deal trades in 2008, as against 589 in 2007.
Analysts said that high net worth individuals, foreign institutional investors and other big corporate investors have stayed away from large-sized deals last year, leading to the fall.
There could be a lull in the coming year as well. Siddharth Bhamre, fund manager (derivatives and equities), Angel Broking, said that the number of deals this year could either be lesser or just the same as last year.

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