SEBI segregation fiat has PMS players flummoxed

The Securities and Exchange Board of India’s (SEBI) decision to ask portfolio management service (PMS) providers to separate investments in unlisted securities in their clients’ accounts is giving them sleepless nights.

Such a segregation may squeeze a company’s manoeuvring power to invest in private companies and debt securities, say experts.

The PMS category describes investment managers who provide customised fund management services typically for high net worth individuals. They invest in various asset classes, including listed and unlisted equity, as well as debt instruments.

The regulator asked portfolio managers to ensure that unlisted securities were segregated in client accounts on February 10 in a circular that also raised the minimum PMS ticket size to Rs25 lakh.

The new rules are likely to hit portfolio managers who wish to invest in unlisted shares of private companies, according to a note from law firm Nishith Desai Associates dated February 22, 2012.

“A portfolio manager with more than 50 clients, henceforth, may not be able to invest in the shares of a private company as the number of shareholders in a private company is limited to 50,” said the note titled ‘Pooling of retail investors under portfolio managers regulations now difficult!’ and authored by Deepak Jodhani, Vivek Mimani, Kishore Joshi and Siddharth Shah.

The odds are high. Some unlisted companies are structured in a way that would make segregation difficult, said the head of a large PMS house. “If the company has only 100 shares to which I can subscribe, how do I divide it among 500 client accounts?” he asked.

Industry stakeholders are likely to seek clarification on the same, according to the chief executive officer of a domestic PMS provider.

“This may have an impact on real estate investors and private equity PMS providers,” he added.