In response to Moneylife campaign for better disclosure of PMS data, a SEBI official has written to us defending the regulator’s stance. Here are the watchdog’s arguments, and our rebuttal
For nearly two years, Moneylife has battled the regulator to get information on the performance of portfolio management services (PMS) through Right to Information (RTI) application. Our effort started with the discovery that one investor has lost a whopping Rs1 crore (Read: Sordid tales) in a single action of gross mis-selling and a doctor couple whose nest egg halved in PMS (Read: Bad experience). The Securities Exchange Board of India (SEBI), which swears by a ‘disclosure’-based regime, thwarted our attempt to collect PMS data at every turn. We filed an RTI request, which was turned down. We appealed to the Central Information Commission (CIC), who ordered SEBI to put PMS information in the public domain (Read: Power of RTI: CIC directs SEBI to disclose all information related to PMS). Even that order has not been followed in spirit.
So we did more work. We struggled to compile the information that was available. We filed another RTI seeking data on a compact disk, as if it is parting with state secrets. SEBI refused. We then conducted a survey to get reactions from PMS investors and compiled it all in our cover story (Read over cover story here : Portfolio Management Schemes: Will Your Portfolio Blow Up?). Finally, SEBI has woken up, but in anger. Amritha S Naik, an assistant manager at the Investment Management Department wrote to us defending SEBI’s position on niggardly disclosure and claiming that it was doing plenty for investors. Read the full letter below.
Incidentally, her predecessor was in touch with us when we started our campaign, but quickly clammed up and refused to respond, like all official channels of SEBI. Ms Naik’s letter too has not been routed through the communications department. We are not even sure whether mid-level SEBI officials are allowed to dash off letters to the media on their own on a selective basis. Here are the some of the main points of Ms Naik’s letter and our rebuttal.
“Minimum investment per client increased from Rs5 lakh to Rs25 lakh so that only sophisticated investors can have access to such services”.
Moneylife: We wonder what is SEBI’s definition of “sophisticated”. The PMS investors that Moneylife has come across and who have lost money are indeed “sophisticated” but not necessarily ‘sophisticated investors’. They are doctor, actors, singers, editors, marketing consultants, advertising gurus and IT experts. Do they understand financial products? No. In fact, they choose the PMS only because they want expert money management and are willing to pay for expertise that keeps their money safe and growing. Yet, a majority of them end up with pathetic returns or even lose a part of their principal. Will Ms Naik explain to us how a “higher networth” is equal to “more sophisticated understanding of products and markets”. Do they mean that a Kareena Kapoor or a Sachin Tendulkar will have a terrific post-retirement career as experts in choosing the right financial products? Many years ago SEBI borrowed terms like “sophisticated” or “discerning” investors from the West and framed appropriately loose regulations for them. As the subsequent experience has shown, this assumption is all bunkum. This is why in UK and US, regulators have woken up to more instrusive regulation rather than hands-off, purely disclosure-based regulation. Maybe SEBI officials need to make a few more foreign trips to get the hang of where the global regulation is headed.
“With regard to PMS investors not having sufficient data to enable them to make an informed choice of a Portfolio Manager, we have tried to provide the available data in the best possible manner and in a way that is as informative as possible. We are also continuously working at making better information available from the perspective of PMS investors.
Moneylife: If SEBI is truly working to part with the data instead of trying to suppress it, why does SEBI continue to thwart our attempts to provide reliable information to hapless investors? SEBI has only started disclosing monthly PMS data after losing in an RTI appeal by Moneylife, and the data is hard to compile. It has also uploaded performance data only from January 2013. It is impossible to obtain data of every PMS given the site is pathetically slow and prevents easy comparison. More importantly, the performance needs to be compared with a benchmark. SEBI provides consolidated data of all schemes of a PMS, which is unusable by an investor. An individual needs to know how each scheme has performed and whether it has beaten its respective benchmark or not. This is available in the disclosure document sent to existing clients and SEBI. This should be made available. Even in the disclosure document, only three years worth of PMS data is available, unlike mutual funds which schemes’ performance is disclosed from inception. Why can’t the same thing be implemented for PMS schemes? But then, SEBI claims that every single PMS is individually customized, more about that later.
“The PMS is expected to individually and independently manage the funds of each client in accordance with the needs of the clients which does not partake the character of a mutual funds”… “One of the main factors hindering this is that the data in respect of PMS is not amenable to straightforward consolidation in view of the fact that PMS is essentially an individual-oriented and customised product rather than a group-oriented product. No units are issued and there is no NAV. Hence the data of various clients at a single PMS provider or across PMS providers is not amenable to consolidation, and thereby easy comparison…Disclosure Documents (DD) of the PMS are meant for the clients of the PMS. The portfolio managers are required to give access to DD to the clients through login id and password so that each client can view its portfolio, performance etc. The clients may not like to expose its portfolio to general public.”
Nice claim, but if this is the case then:
Our research on the PMS data that we could lay our hands on reveals that the schemes of only two PMS companies have done consistently well in a three-year period. Many have performed erratically and some have not even performed at all. This information is only available in disclosure documents and our inquiry shows that no banker, who hawks PMS products, has access to this information or has compiled it for clients before recommending specific schemes. The recommendations are all a part of revenue deals between PMS companies and the banks. This can only be to the disadvantage of investors who are required to make a minimum investment of Rs25 lakh for PMS services, by SEBI’s own diktat.
What is it so hard for SEBI officials to understand that investor can make an informed choice only by comparing the performance of different portfolio managers? Probably because SEBI either does not engage with investors directly or does so selectively. One can see how varied the performance of portfolio mangers can be in our analysis of 26 PMS companies. (Read: PMS Performance: The Good, the Average and the Ugly)
“Performance fees, if charged, shall be mandatorily on the basis of high-water mark principle.” Moneylife: Again, performance fee is only a part of the fees paid to a portfolio manager. The total advisory or performance fee paid to portfolio managers may be a fixed charge on the quantum of the funds being managed (or) charges linked to portfolio return (or) combination of both This is mentioned only in the disclosure document. Our cover story mentioned that the fees are negotiable from client to client. Therefore, an individual with a higher corpus can negotiate a lower fee. However, this is not the only cost; there are other expenses like brokerage and transaction costs, depository fees etc. This could be the highest if the portfolio manager resorts to excessive churning. In our PMS survey (Read the 'Survey Findings' section over here), many investors claimed excessive churning. SEBI has still to issue an order in the case pertaining to the actress-singer Suchitra Krishnamurthi (Read HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns) who suffered enormous losses because of such reckless churning. SEBI has failed to address the issue because it is probably not even aware of it. Or does not want to exercise its brains as regards what it means for investors, like many other issues. We have accessed and examined portfolios where PMS companies have excessively churned stocks as well as mutual fund investments to create losses in the books of investors.
Based on how ill-informed and untenable SEBI’s arguments are, far from an apology, we demand that SEBI come down from its ivory tower, read the comments to our articles on PMS and engage with us in finding out facts, collating information and honestly redress genuine grievances about mis-selling, mismanagement and downright cheating. We would also like it to respond to all our reports on such mis-selling, not selectively. Only then will start justifying its role as a regulator.
Here is the letter we received from Ms Naik…
1. SEBI has taken various measures in the interest of investors of the Portfolio Management Services (PMS). Some of the measures taken by the SEBI in recent past are as under:
i. Minimum investment per client increased from Rs5 lakh to Rs25 lakh so that only sophisticated investors can have access to such services.
ii. Segregation of unlisted securities in individual client accounts.
iii. Raising the minimum net-worth requirement for Portfolio Manager from Rs50 lakh to Rs2 crore excluding minimum capital adequacy/ net -worth requirement for any other activity.
iv. Performance fees, if charged, shall be mandatorily on the basis of high-water mark principle.
v. The PMS is expected to individually and independently manage the funds of each client in accordance with the needs of the clients, which does not partake the character of a mutual funds.
2. You are aware that PMS is in many ways different from Mutual Fund. Some of the major differences are given as under:
i. In contrast to Mutual Funds, in case of PMS no pooling is allowed and no unit is issued
ii. PMS products are meant for investors with higher net-worth, and who are generally understood to be having more sophisticated understanding of the market and products.
iii. The relationship between portfolio manager and the client is contractual in nature and PMS is expected to provide customized service taking into consideration the need of customers, his preferences, risk profiling, suitability etc.
iv. The PMS is expected to individually and independently manage the funds of each client in accordance with the mandate of the client which is rather different from the character of a mutual fund.
v. The performance of the portfolio manager for various clients will be different as investment philosophy, need, preference, risk taking ability, choice of different products, mandate etc. are different for different clients.
vi. Disclosure Documents (DD) of the PMS are meant for the clients of the PMS. The portfolio managers are required to give access to DD to the clients through login id and password so that each client can view its portfolio, performance etc. The clients may not like to expose its portfolio to general public.
3. With regard to PMS investors not having sufficient data to enable them to make an informed choice of a Portfolio Manager, it is stated that we have tried to provide the available data in the best possible manner and in a way that is as informative as possible. We are also continuously working at making better information available from the perspective of PMS investors. One of the main factors hindering this is that the data in respect of PMS is not amenable to straightforward consolidation in view of the fact that PMS is essentially an individual oriented and customised product rather than a group oriented product. No units are issued and there is no NAV. Hence the data of various clients at a single PMS provider or across PMS providers is not amenable to consolidation, and thereby easy comparison.
4. And, finally the language and tone used in your article is unacceptably offensive. Characterising the SEBI staff as "corrupt" is really most unbecoming of your magazine. While constructive suggestions and criticisms are welcome, the use of defamatory expressions should be totally eschewed. The least we expect from you is an unqualified apology and no more repetition of this kind in future.
Amruta S. Naik
Investment Management Department, Division of Funds I
NPAsource.com has conducted 200 deals worth Rs100 crore so far and sees e-auctions of NPAs worth Rs600 crore in FY14
NPAsource.com, which focuses on resolution of stressed assets, said it expects to undertake e-auctions of various banks’ non-performing-assets (NPAs) worth about Rs600 crore during 2013-14. It would undertake e-auction of NPAs for Dena Bank, IDBI Bank, SIDBI, Bank of Baroda, Indian Overseas Bank, Indian Bank, State Bank of Hyderabad, Bank of Maharashtra as well as Kotak Mahindra Bank.
“We already have a platform for all stakeholders for resolution of NPAs and so the e-auction route is a natural growth ladder for us. Besides, despite NPAs being critical issue for banks, and e-auction of NPAs just at its infancy stage, there is a lot of scope for the company to grow in this area. Today, even tractors are being sold through the e-auction route by banks,” said DK Jain, chairman and managing director of Atishya group, which owns NPAsource.com.
The portal believes that the growth in e-auctions is likely to be strong as bad assets of banks have grown significantly. Gross NPA of public sector banks rose to Rs1.76 lakh crore as on June 2013 from Rs1.55 lakh crore as on March 2013.
Earlier this year, Ministry of Finance (MoF) made it mandatory for all commercial banks to move from physical auctions to e-auction mode for all cases of NPAs under the Debt Recovery Tribunal (DRT). NPAsource.com said till date it had already conducted over 200 deals worth more than Rs100 crore and expect residential, agricultural, commercial and industrial properties to be sold through the e-auction route.