SEBI board may consider hiking PMS investment limit to Rs 50 lakh, tighter norms for auditors

The Securities and Exchange Board of India (SEBI) may discuss new regulations for auditors, portfolio management services (PMS) and proxy advisory services at its upcoming board meeting on November 7. Among the key proposals it is planning for the PMS, the board will consider increasing the minimum investment limit from Rs 2500000 to Rs 5000000 and also upping the minimum networth requirement from Rs 20000000 to Rs 50000000 for a company to run a PMS fund, sources told Moneycontrol. SEBI had hiked the minimum investment limit for PMS funds from Rs 500000 to Rs 2500000 in 2012 while the minimum net worth requirement was last raised from Rs 5000000 to Rs 20000000 in August 2008. The increase in the PMS investment limit would be in line with rising incomes and the fact that such products entail higher risk and may not be well suited for retail investors. PMS funds are alternative funds that can follow riskier investment strategies compared to traditional mutual funds. “However, SEBI should not interfere too much into fees and expense structure of the PMS businesses. Since PMS products are meant for investors with high risk taking capacity, the commercial arrangement between clients and portfolio managers should not be over-regulated and should be based on mutual agreement with clients and the manager,” Anil Chaudhary, Partner, Finsec Law Advisors told Moneycontrol. As for the increase in minimum net worth, SEBI feels that the enhancement of this criterion is overdue. “The increase in compliance costs, cost related to information technology and cybersecurity as well as the increase in the minimum number of employees that are needed to run such an operation necessitates a higher investment from the portfolio manager in the business,” said a source. Further, the higher net worth requirement shall be a deterrent to non-serious players during new applications and will put pressure on fringe players coexisting with serious money managers, the source added. The PMS fund business has increased significantly over the last decade, with asset under management (AUM) more than doubling from Rs 6.04000000000000 to Rs 13.7000000000000. Within this, the discretionary fund business, in which investors have a say in the way investments are selected, has grown even faster, growing 5.5 times to Rs 99,8250000000. SEBI is also planning to increase disclosure requirements by PMS and may increase supervision of distributors of PMS funds. The regulator is also looking to streamline regulations for auditors, especially after the string of accounting scandals that have hit India Inc. SEBI has regulatory oversight over audit issues related to listed companies while everything else is overseen by ICAI and the NFRA. Norms that the regulator may tightening include auditors citing proper reason if they are resigning from a firm. If the auditor has audited three of the firm’s quarterly results, it should go on to complete the fourth quarter audit before resigning. "The SEBI oversight over auditors of listed companies and market intermediaries has been called in question in light of the recent ruling by Securities Appellate Tribunal in the case of Price Waterhouse. Although SEBI has the powers to govern and regulate all persons who are associated with securities market, issues have been raised over the power of SEBI to adjudicate and impose penalties for lapses by auditors while auditing listed companies. A new codified regulation prescribing specific duties and liabilities of auditors would help in clearing the air with respect to the jurisdictional reach of SEBI over the auditors,” said Chaudhary of Finsec Law Advisors. “Also, it would be interesting to see whether the proposed regulations cover only intentional fraud by auditors or SEBI would also impose penalties for professional lapses/misconduct by auditors, which otherwise is governed under the Chartered Accountants Act, 1949", he added. Finally, SEBI may also bring about a change in norms for proxy advisory services, giving such firms more power to empower investors as well as making sure proxy firms are independently run and disclose any conflict of interest. These steps proposed to be taken by SEBI are welcome in more ways than one," said independent tax counsel Aarti Sathe. "Increasing the threshold limit of PMS will surely attract only serious players and ensure the creditworthiness of the investors by putting a proper framework and ensuring his or her net worth," she added. Besides, stricter regulations on the role of the auditors will bring in a sense of clean practices in the audit work undertaken. However, SEBI should also be mindful that while framing these regulations for auditors, penalties for technical or minor procedural lapses should not be imposed, thereby unnecessarily increasing more compliance."