How does one ensure that retail investors get regulatory oversight protection, without taking on the onerous task of overseeing the many market entities that manage private money? This appears to be the objective behind the Securities and Exchange Board of India's (SEBI) recent decision to change regulations governing portfolio managers and alternative investment funds. The capital markets regulator has significantly raised the minimum investment requirement for those entering into portfolio management contracts, from the existing Rs 5 lakh to Rs 25 lakh. In effect, what it does is to restrict access to customised portfolio management services to more affluent individuals. Those with smaller investible sums of less than Rs 25 lakh will now have to take the mutual fund route to avail of professional investment expertise.
There are many merits to this move. For one, it may improve service levels in this lightly regulated industry. Given that portfolio managers are supposed to tailor customised portfolios for each client, the business isn't automatically scalable like mutual funds. A portfolio manager, by definition, cannot render good service, if he oversees scores of portfolios at the same time. Yet, low entry barriers have led to a proliferation of firms offering these services at low ticket sizes. From arms of brokerages to banks and freelance advisors, there are as many as 266 portfolio managers registered today with SEBI. Some of them offer ‘tailor-made' portfolios for individual investors, while actually pooling client portfolios and funds. Higher ticket sizes may help deter this practice, besides protecting small investors from the risks of poorly diversified or unregulated stock market investments. SEBI's regulatory requirements for portfolio managers are currently not as onerous as that for mutual funds, the premise being that affluent investors can look after their interests much better. Mutual funds are, thus, subjected to stock, sector and asset-specific exposure limits in the portfolios managed by them. They also have to adhere to a fixed fee structure, and make public disclosures of net asset values and details of schemes. In contrast, portfolio managers can freely vary these terms based on individual contracts with clients.
The time has also come for SEBI to properly define whom exactly it is seeking to protect as a ‘retail' investor. If for the purposes of portfolio management contracts, investors with less than Rs 25 lakh would now qualify as ‘retail', it is below Rs 2 lakh in respect of individuals applying for initial public offers. Mutual funds have yet another definition, with those with investments of less than Rs 5 lakh in a scheme deemed as retail. Definitions apart, one needs to also ask whether wealthy individuals can automatically be assumed to be investment-savvy and thus less deserving of regulatory oversight. Setting the record straight on these issues may be critical if SEBI wants a clearer picture of its regulatory boundaries with respect to capital market entities.