PMS companies told to share anti-money laundering policies

Besides senior professionals figuring in the high net worth individual (HNI) investor club, several Bollywood actors, cricketers, as well as high-level government functionaries put a slice of their wealth with PMS firms.

Less than a fortnight ago, the Securities & Exchange Board of India (Sebi) asked some of the PMS houses to share the details of their AML policies, two persons told ET .

“There are two key things to look into: first, even though third-party transfers are not allowed, a service provider has to check whether the money that is flowing into a PMS actually belongs to the client; second, whether there are sharp transactions, like an individual using the PMS route to buy stocks of own companies or other shares to avoid disclosure regulations,” said a fund manager.

An investor may have a greater say in which stocks are bought by the PMS service provider, depending on the nature of the scheme. In a standard discretionary PMS, where investors are supposed to replicate a model portfolio, an investor is not in a position to influence the manager. But in customised portfolios, or in non-discretionary schemes, an investor may direct the stocks that portfolio holds. The minimum investment in a PMS is ₹50 lakh, up from ₹25 lakh in 2019.

However, according to another person in the industry, asking PMS firms to share their AML policies could well be Sebi’s way of carrying out a hygiene check with the size of the PMS industry having grown in recent years.

The total size of PMS in India is close to little less than ₹5 lakh crore, recording a rise of over 20%. Unlike the more granular AML framework for banks and larger pooled vehicles like mutual funds, there is no uniform policy for the PMS industry. “So, the chance of untaxed or undisclosed money moving into PMS may be slightly higher. But many PMS houses carry out enhanced due diligence when large sums come from HNIs who are linked to the government and are considered as politically exposed persons,” said a compliance head of a brokerage.According to industry sources, the regulator is expected to carry out inspection of PMS entities. “Earlier, PMS certificates were renewed every three years and at the time of renewal, the regulator used to look into the books. Now, with perpetual registration, many PMS firms may have not been inspected for to 5 to 6 years. Sebi may go through some of the transaction details and KYC. However, we don’t know how intense the exercise would be,” said an officer with a PMS firm.

A year ago Sebi had collected a mountain of information on PMS entities. These included: (1) details of assets under management (AUM) and number of clients under discretionary, non-discretionary, and advisory PMS; (2) investment approach wise details of number of clients and AUM; (3) AUM and details of clients who are not covered under any investment approach; and, (3) extent of overlap in portfolio of each client under the same approach. A few months before that Sebi had asked all PMS firms to share the quantum of various securities bought by different kinds of clients.