PMS firms misinterpret SEBI rule and avoid disclosure
SEBI’s PMS circular asks for disclosure of PMS information on the companies’ website. Many companies like Alchemy Capital wrongly interpret this circular to limit to disclosure only to clients. Besides, what are they afraid of? And why is SEBI not clearer with its circular?
Moneylife’s crusade for greater transparency and disclosure of portfolio management services (PMS) has drawn a sharp reaction from Alchemy Capital Management (Alchemy). In an earlier story, we pointed out that Alchemy Capital Management was one of the companies which has not put up the disclosure document on its website, unlike many others which have indeed disclosed theirs. Our article was based on an interpretation of SEBI’s circular addressed to registered portfolio managers.
The SEBI circular IMD/DF/16/2010, dated 2 November 2010, states: “To ensure compliance with Regulation 14(2)(b)(iv) of SEBI (Portfolio Managers) Regulations, 1993, portfolio managers shall disclose the performance of portfolios grouped by investment category for the past three years as per the enclosed prescribed tabular format. Portfolio Managers shall also ensure that the disclosure document is given to all clients along with the account opening form at least two days in advance of signing the agreement. In order to ensure that the clients have access to updated information about the portfolio manager, portfolio managers shall place the latest disclosure document on their website, wherever possible.”
Alchemy has taken offence to the article based on the above circular and insists that it has complied with disclosure and transparency norms set down by SEBI. It wrote to us arguing that: “The circular expressly uses the words ‘the clients’ in the context of persons who should have access to the latest disclosure document. Clearly, so long as ‘clients’ (meaning those who have the relationship with the PMS company) can access the latest disclosure document, the PMS Company has met its obligations under this circular. On Alchemy’s website, its latest disclosure document is available to, and easily accessible by, all its clients and according Alchemy is in compliance with this requirement.” 
There are two issues here. Firstly, many PMS companies, unlike Alchemy, have put up the disclosure document for the public to inspect even without asking for it. Among these are Quantum Advisors, ING Investment Management, SBI Funds Management, Tata Asset Management, and many others. They are part of the 20 companies out of the 46 companies we chose to analyse. Anyone can see these documents, not just clients. We wrote to the remaining 26 companies requesting their disclosure documents. Eight of them agreed to email them, including Parag Parikh Financial Advisory Services, Motilal Oswal Asset Management and Reliance Capital Asset Management. Alchemy is part of the 26 companies, whose disclosure documents are not in the public domain. Of these, 17 including Enam Asset Management, Morgan Stanley India Financial Services, have not bothered to reply to our mail request. Alchemy, Avendus PE Investment Advisors and HDFC Asset Management argued that it is available to clients only. Are they right? 
This takes us to the second point, SEBI’s own interpretation of the PMS disclosure rule. The whole idea of disclosure document is for the public to make an informed decision, by comparing and contrasting portfolio management schemes before making a call. In fact, SEBI clearly had advised investors to ask for the disclosure document from any PMS company before investing in PMS.
Ms Maninder Cheema, who until recently oversaw PMS at SEBI, confidently told us sometime ago that companies offering PMS are supposed to disclose their performance and other details on their website. Indeed, Mr Aman Jain, AGM, SEBI, confidently argued before Satyananda Mishra, Central Information Commissioner (CIC), during an RTI hearing, on 17 January 2013, that each PMS company publishes disclosure documents in their respective website while also reporting to SEBI, on a monthly basis, and the public could always visit the respective website and find out about the information required. This was a lie, as we subsequently discovered. By the way, we won this RTI appeal that forced SEBI to disclose PMS information on its website. (Power of RTI: CIC directs SEBI to disclose all information related to PMS). 
Clearly, Alchemy had conveniently twisted and interpreted SEBI’S circular for its own good. Also, SEBI (Portfolio Managers) Regulations, 1993, clearly states: “The portfolio manager shall provide to the client, the Disclosure Document as specified in Schedule V, along with a certificate in Form C as specified in Schedule I, at least two days prior to entering into an agreement with the client as referred to in sub-regulation”. (emphasis ours) You can check the document for yourselves here on SEBI’s website. If we go by the above SEBI definition, does this mean an investor becomes a “client” BEFORE signing an agreement? Alchemy has found it convenient to use the textbook definition of client (i.e. once you’ve signed on the dotted line). 
Alchemy’s interpretation of the circular is convenient and wrong. If not, SEBI would have argued at the CIC hearing that there is no need to disclose PMS information to the general public. That leaves us with just one question: And what does Alchemy have to hide?
Look out for the next issue of Moneylife magazine which carries the first-ever in-depth analysis of PMS.
Other Moneylife articles on portfolio management services can be accessed below



Dr. Hari Dev Goyal

4 years ago

Will P.M. make any difference ind disclosing when SEBI's Chairman Mr. U.K.Sinha (whose appointment is under SC scrutiny since he became chairman by making false declaration and now getting emoluments of Rs. Four Crores per annum) and its full time member Mr. Prashant Saran openly refuse to honour SEBI Act, 1992 and RTI Act, 2005. Prashant Saran has replied to Shri S.N. Mishra, Chief Information Commissioner that he won't provide information to the investor and for his actions and decisions, SEBI does not keep noting on file. CIC Mr. Satya Nand Mishra has been made helpless and redundant by SEBI.

India's growth weak, price pressures rising, says Nomura

According to Nomura, the PMI, which fell to 50.1 in July from 50.3 in June suggest that, even as India's domestic demand remains weak, price pressures are rising

India's manufacturing PMI fell to 50.1 in July from 50.3 in June, due to a continued contraction in output and new orders. Overall, the PMI data suggest that, even as domestic demand remains weak, price pressures are rising and besides external sector stress, this is another reason for the Reserve Bank of India (RBI) to remain cautious, says Nomura Financial Advisory and Securities (India) Pvt Ltd.


The manufacturing PMI fell to 50.1 in July from 50.3 in June, its lowest level since April 2009 and just above the contraction/ expansion threshold of 50. The decline was due to continued weakness in the output and the new orders sub-indices.


Weaker demand:

Both domestic and external demand weakened in July. The new orders sub-index fell to 49.5 in July from 49.7 in June, reflecting weak domestic demand, while the new export orders index fell to 52.4 from 54.4. Sectoral data suggest the decline in new orders was mainly in the intermediate and investment goods sectors.


Output contracts, inventory lowered:

The output sub-index remained below the 50 threshold for the third straight month even as it rose to 49.8 from 49.1, which indicates that weak demand, increased competition and persistent supply-side pressures are forcing manufacturers to cut production. The new orders/inventory ratio reversed after seven straight months of decline and rose marginally to 0.99 from 0.97, as manufacturers lowered inventories - the finished goods inventory sub-index fell to 50.1 from 51.0.


Price pressures resurface:

The input price sub-index surged to 60.6 from 55.9, reflecting higher imported price pressures due to a weak rupee. More importantly, the output price sub-index, which has a lagged correlation with core WPI inflation, rose to 53.4 from 50.9, as firms attempted to pass on higher costs, albeit at a slower pace, which suggests margins are under pressure.


Nomura said, "We are negative on India’s economic outlook due to continued external sector pressures, tighter liquidity conditions, weak growth and political risks ahead of elections. In our baseline scenario (70% likelihood), we expect repo rates to remain on hold this fiscal year and GDP growth at a below-consensus 5.0% y-o-y in FY14 (year-end March 2014), the same as in FY13."


Fiscal deficit likely to worsen to 5.1% of GDP by 2014 fiscal end

The government’s continued fiscal indiscipline, before the election, is worrying and Nomura expects the fiscal deficit to rise to 5.1%, which would mean that the government is likely to overshoot its estimated target of 4.8%

Nomura has sounded warning bells about India’s fiscal deficit, which is likely to worsen, if adequate steps are not taken by the government to contain expenditure and boost revenues. It expects fiscal deficit to touch 5.1% as against the government budgeted estimate of 4.8%. It said in its report, “Fiscal pressures are building. The government is focussed on increasing tax compliance, but growth is very weak, asset sales have had a slow start and rupee depreciation has increased the subsidy burden. Unless spending is cut (a strategy used in FY13, but would hurt growth and could backfire since this is a pre-election year), fiscal slippage is likely.”


The chart above illustrates how reckless the government has been on spending this fiscal. The black line shows a steep increase while the revenues have plummeted. The gap between the two is inevitable and this could worsen if the trend is not reverse (i.e. if government does not cut spending).

With the elections coming up next year, it is unlikely that the government will cut expenditure. It has shown to adopt a pro-poor stance and populist measures are more likely. “This was due to both lower revenues and higher spending than budget targets. During Q1 FY14, receipts (revenue and non-debt capital) contracted by 1.4% y-o-y (budget target: 22.1% y-o-y), while spending rose 22.7% (18.2%). This was partly due to higher tax refunds and a spillover of spending from last fiscal year,” observes Nomura. This was evident when the Cabinet passed the controversial Food Security Bill, which is expected to put a dent in the country’s finances over the long term.

According to Nomura, fiscal deficit in Q1 FY14 was 48.4% of the full year target; this is substantially higher than last year (37%) and the five-year average of 27%. This figure has shown how rapidly the government has already spent for the fiscal year 2014.


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