PMS players had to change plans after restrictions on unlisted securities

Restrictions on unlisted securities to hit new schemes, alternative routes being explored

Multiple portfolio managers have had to look at a change in plans following the announcement of new regulations governing their segment.

Several portfolio management services (PMS) providers are now structuring their investments differently after restrictions on investments in unlisted securities, according to people familiar with the matter. Some players are withdrawing their applications for new schemes, while others are looking to use non-PMS structures, they said.

“There are (a) lot of applications we had filed… which specifically wanted to invest in unlisted securities. Though regulations have not been notified, but we clearly told them to withdraw…,” said one person who advises PMS providers.

“In the last two-three months… Sebi had been nudging all of these people who were filing to… file under AIF,” said another person with knowledge of the matter.

Unlisted securities refer to investments which aren’t traded on the stock exchange. Such investments are typically seen to be more difficult to enter and exit than those listed for trading on the bourses. The Securities and Exchange Board of India in its November board meeting had introduced restrictions on the holding of such securities in PMS schemes. It said that discretionary portfolio managers are to only invest in listed securities, money market instruments, units of mutual funds and other instruments that the regulator may specify. Money market instruments are debt securities.

Ashish Shanker associate director and head of investments for Motilal Oswal Wealth Management said that non-equity funds are likely to be most impacted. There are some real estate and private equity funds which used the PMS route for co-investment, which can allow investors to put in additional money into a company in addition to their investment in the fund.  Their ability to replicate this in future schemes under the PMS umbrella would be impacted.

"It will have an impact on non-equity products like real estate or private equity which used to operate on the PMS platform," he said.

Another expert said real estate funds in particular made use of the PMS route to invest in unlisted securities. While they can explore the AIF route, there is less certainty on taxation for the AIF regime, and the minimum investment is one crore rupees, said the person. The minimum investment announced for PMS schemes is Rs 50 lakhs.

 For some, the transition has by now been underway for some time.

“(Many schemes)…had already anyway moved to the AIF vehicle,” said Prateek Pant, co-founder and head of product and solutions at Sanctum Wealth Management.

The move on unlisted securities is part of a revamp in regulations, the first in nearly two decades. The PMS regulations had been in place since 1993. The latest regulations look to update them in light of new market realities. A working group that the regulator set up had submitted its recommendations based on which the changes were announced in November.  In addition to restrictions on unlisted securities, it also seeks to increase the net worth for PMS providers and ensure better oversight of client assets.

The industry manages over Rs 16 trillion in assets, shows Sebi data.  

Seeking alternatives:

Sebi seeks restrictions on unlisted securities in PMS 

Applications for PMS schemes with unlisted securities being withdrawn

Some looking to come through AIF route

AIFs have higher ticket size, tax uncertainty

Real estate funds among key affected segments