Sebi may cap PMS fees on realty fund

Source:23 Apr 2010, 0559 hrs IST,Reena Zachariah & Apurv Gupta,ET Bureau


MUMBAI: The Securities and Exchange Board of India (Sebi) is considering a cap on the fees charged by portfolio management service (PMS) providers for their real estate fund, a person familiar with the development told ET. Investors have complained to Sebi that most PMS providers are charging the full management fee upfront , rather than in proportion to the net invested amount.

The capital market regulator recently met some of the top fund houses to understand their fee structure, and recommend changes to make it more investor-friendly .

Most real estate funds collect money from their clients in phases. Assuming , a client wants to invest Rs 100 in four instalments of Rs 25, and the annual management fee is 2%. Ideally, the money manager should charge a fee of 50 paise on every instalment of Rs 25. Instead, he charges the client Rs 2 at the time of the first instalment itself.

According to a person familiar with the matter, the thinking within Sebi is that it is unfair of portfolio managers to charge a fee for the amount they are not managing.

Currently, portfolio managers follow the 2:20 structure, where 2% is the fixed annual management fee, and 20% is the performance management fee.

Portfolio managers are eligible to charge the performance management fee only if they cross the hurdle rate, which typically ranges from 10-12 %. For every rupee that the fund delivers in excess of the hurdle rate, the portfolio manager pockets 20 paise.

Understandably, portfolio managers think the current fee structure is good enough.
“The investor expects returns on the gross commitment amount and not on the net amount after deduction of fee,” a senior official with one of the top PMS providers in the country said.

“The practise of charging fee during the commitment period aligns the interest of the investor to the portfolio manager. Besides, the performance fee eligibility is only after the specified and agreed hurdle rate is crossed, which is an incentive for the portfolio manager to deliver superior risk-adjusted returns,” he added.

Following the ban on entry load charged by mutual fund houses, inflows into equity schemes have dried up. That is because distributors’ fee (which was being funded by the entry load) declined sharply and they chose to sell financial products which earned them a higher commission.

As a result, most of the large fund houses have increasingly been focusing on portfolio management services , given the flexibility in charging fees and paying the distributors.

According to a portfolio manager with a domestic brokerage house, many fund houses have been charging disproportionate fees, and also the calculation is not always transparent. “There is a need for having some guidelines on how to calculate fees for unlisted product,” he said.

According to Sebi data for 2009, there are 247 portfolio managers registered with the regulator, managing around Rs 2.71 lakh crore. Of this, Rs 2.35 lakh crore is invested in debt schemes, Rs 30,000 crore in equity, and Rs 6,000 crore in other investment schemes.

Portfolio management service providers offer similar services such as venture capital funds and hedge funds. However, in order to address certain systemic issues involved with portfolio managers, Sebi has in recent times has tightened regulations governing them. These included increasing the minimum net worth requirement for registration,
 and having to maintain an individual account for each client rather than pooling the assets.