Rising compliance costs, processes stifling smaller PMS funds, say portfolio managers

Smaller PMS players are finding cumbersome compliance processes and related costs stifling growth and skewing the playing field in favour of larger players.

The Sebi has constituted an ease of doing business committee where it has taken up the compliance cost issues for discussion, said people familiar with the developments.

The road to hell is paved with good intentions, goes the saying, which Portfolio Management Services (PMS) funds may quite agree with.

Smaller PMS players are finding compliance processes cumbersome, with additional costs stifling growth and skewing the playing field in favour of larger players.

“Compliance costs have risen of late because of the new regulations, making it difficult for smaller PMS to compete,” said Divam Sharma of Green Portfolio.

Moneycontrol spoke to seven fund managers and attempted to calculate the minimum compliance costs for a PMS, which has worked out to Rs 31.6 lakh per annum. Operating costs like lease, IT systems, and salaries adds up to roughly another Rs 95 lakh.

Assuming, the PMS gets a 1 percent management fees, it would need at least Rs 125 crore in AUM to break-even.

Breaking Down The Compliance Cost

In 2020, SEBI mandated every PMS fund to have a separate compliance officer. Before that, the principal officer and compliance officer used to be the same person, which also helped save on costs. Salary of an experienced compliance officer is close to Rs 20 lakh per annum or above.

Then comes the cost of a custodian, which is around Rs 7 lakh per annum.
There are four different audits – statutory, portfolio, performance, and internal – which together cost around Rs 4 lakh per annum.

Sebi has also mandated that there should be a separate dealing room, a requirement that may be hurting smaller PMS players, some of which operate out of rented residential properties.

“Smaller PMS like ours typically have only 3-4 employees, so we take a small office space. But then, we need to create a separate room for dealing, which adds to our real estate costs,” a fund manager told Moneycontrol on the condition of anonymity.

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Another aspect of cost is onboarding and KYC. “With the digital infrastructure already in place, investor KYC can be centralized and need not be replicated at every portfolio manager level”, said Vivek Vasudevan of Agreya Capital.

“In addition to running CKYC and KRA checks, which in itself is a duplication, the portfolio managers also typically do anti-money laundering and sanctions checks using specialist software packages where the costs can range from Rs 75,000 to Rs 1 lakh per annum. This is over and above one time set up costs and some of these can actually be done by custodian and reduce costs,” Vasudevan added.

The constant offsite reporting mandated by Sebi from PMS managers is another challenge. Every quarter, Sebi seeks submission of 66 reports from PMS entities, covering aspects like client details, investment amount, investment destinations, timing of investments, stock holdings, performance metrics, and more. This reporting takes around 7 working days to complete, said industry players Moneycontrol spoke to.

Over and Above Compliance
An approximate salary estimate would be Rs 80 lakh per annum for research analysts, sales employees, client onboarding and servicing, dealer, and operations, said fund managers. The salaries are calculated assuming that the founder itself is the fund manager and he does not take a fee for that, at least at the beginning.

Apart from that, a office rent at a reasonable location would be around Rs 40,000-75,000 per month, at the very least.

Then, there are software costs or tech-related costs which come to Rs 5 lakhs per annum. To add to it, the Association of Portfolio Managers in India (APMI) membership costs Rs 15,000 for a PMS with an AUM that is lower than Rs 100 crore.

A PMS also has to incur annual cost of Rs 1.5 lakhs towards use of indices against which they benchmark their performance.

Is There A Way Out?
“We can’t say no to regulatory oversight but the regulator can calibrate it to make it less time consuming and less painful for the smaller players,” said a PMS manager with a Rs 2,000 crore AUM. He added instead of monthly reporting, Sebi could consider to allow it on quarterly basis.

Increasing compliance costs due to additional processes are a burden for small players as revenues do not rise in line along with costs in a linear fashion, said Sushant Bhansali, CEO of Ambit Asset Management. There are a few areas where the regulator can consider having fewer compliances for the smaller players, he added, but eventually a strong compliance helps the industry evolves better as clients’ trust deepens.

Regulator Sebi has now constituted an Ease of Doing Business Committee, which has taken up the compliance cost issues for discussion, said people familiar with the development.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​​​

Reference Link: https://www.moneycontrol.com/news/business/markets/pms-sebi-compliance-cost-portfolio-managers-12767996.html

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