The PMS regulations, and the line between portfolio management and a mutual fund.

A portfolio management service is, in legal terms, an arrangement in which a registered manager invests money on behalf of a single client, in a portfolio constructed for that client, and charges a fee. A mutual fund, by contrast, pools money from many clients into a single scheme and invests it according to a fixed mandate. The two structures look, from a distance, similar. They are governed by entirely separate regulators' rules, and the line between them is one of the more consequential pieces of regulatory geography in the Indian capital market.

The Securities and Exchange Board of India's (Portfolio Managers) Regulations, 1993, governed the PMS industry for two and a half decades with relatively little amendment. The 2020 overhaul — formally a new regulation in the same name — changed several things at once. The minimum investment per client rose from twenty-five lakh rupees to fifty lakh. The categorisation of services into discretionary, non-discretionary, and advisory was clarified. Fee structures were standardised, and exit loads regulated. The bar to enter the industry, both as manager and as client, was deliberately raised.

The fifty-lakh line

The fifty-lakh threshold is the most architecturally important number in the PMS regime. A client below the threshold cannot be a PMS client; he must invest, if at all, through a mutual fund scheme. A client above the threshold has access to a structure in which the portfolio is constructed for him alone, in which he holds the securities in his own name rather than in units of a pooled scheme, and in which the tax consequences of each trade fall on him directly. The mutual fund is pooled and convenient; the PMS is segregated and consequential.

A retail investor is, in regulatory terms, a client too small to bear the consequences of his own portfolio.

The 2020 amendments reflected a regulatory anxiety that had been building for years. PMS managers, courting the high-net-worth tier just above the mutual fund threshold, had been marketing aggressively, charging unevenly, and producing returns that were sometimes outstanding and sometimes alarming. The new regime made the disclosures clearer, the fees comparable, and the marketing more cautious. The complaint files at SEBI thinned out, gradually.

The threshold question

The remaining open question, which the 2020 amendments did not settle, is whether the fifty-lakh threshold ought to rise further. The number is now five years old; inflation has done its slow work; the population of clients sitting on the wrong side of the line has grown. The argument for raising the threshold is that the regime is designed for sophisticated investors. The argument against is that, in a country where the median financial portfolio is still in five figures, fifty lakh is already a remarkably sophisticated number. The regulator has, so far, declined to revisit it.