The Indian Portfolio Management Services (PMS) industry has seen a significant uptick in interest from High Net-worth Individuals (HNIs) and Ultra-High Net-worth Individuals (UHNIs). This surge is driven by the growing number of wealthy individuals seeking personalised investment strategies that align with their specific risk tolerance and wealth creation needs. PMS Funds offers a tailored solution, providing access to a diverse range of equity and debt instruments, and enabling investors to benefit from expert portfolio management.

Over the past decade, the PMS investment industry has experienced robust growth, with Assets Under Management (AUM) expanding at a Compound Annual Growth Rate (CAGR) of 22%. As of September 2024, the AUM reached an impressive Rs 7.43 lakh crore, underscoring the industry’s immense potential.

Recognising the increasing importance of PMS Funds, the Securities and Exchange Board of India (SEBI) has taken proactive steps to enhance investor protection and streamline regulations. One significant initiative is the simplification of PMS distributor regulations. Given the customised nature of PMS India offerings, distributors play a vital role in connecting investors with suitable portfolios. By easing regulatory requirements, SEBI aims to facilitate better access to invest in PMS services and promote greater transparency in the industry.

Another notable regulatory change introduced by SEBI is the enhancement of digital on-boarding processes. This move aligns with the increasing adoption of digital technologies in the financial industry and aims to streamline the client onboarding experience, making it more efficient and convenient for investors. By leveraging digital tools, PMS providers can expedite the onboarding process, reduce paperwork, and enhance overall client satisfaction.

Here is a detailed note. 

• Streamlining Oversight of PMS Distributors

In May this year, SEBI introduced a significant change in the oversight of PMS distributors by mandating their registration with the Association of Portfolio Managers in India (APMI) effective January 1, 2025. This move centralises distributor oversight at the industry level, simplifying compliance procedures for Portfolio Managers who are now responsible for ensuring their distributors are registered with APMI and adhere to the relevant SEBI regulations and codes of conduct.

By mandating APMI registration, SEBI aims to foster a more efficient and transparent ecosystem to invest in PMS providers. This aligns with the regulatory body’s broader goal of promoting collective oversight of distributors. 

Further, this approach mirrors the existing framework in the mutual fund industry, where distributors are required to register with the Association of Mutual Funds in India (AMFI) and obtain an AMFI Registration Number (ARN). APMI is expected to release the specific criteria for distributor registration by July 1, 2025. This move signifies a step towards enhancing the overall regulatory landscape for the PMS India industry and promoting investor protection.

• Enhancing Digital On-boarding and Fee Transparency in PMS

In the same month, another circular from SEBI brought a welcome change to the PMS investment landscape by facilitating digital on-boarding for clients and enhancing transparency in fee structures.

One notable move is the acceptance of typed or electronically written confirmations of understanding fees and charges for clients onboarded digitally, moving away from the previous requirement of handwritten confirmations. This change, effective from October 1, 2024, signifies SEBI’s push towards a more digitally inclusive environment.

Further, SEBI promoted fee transparency by mandating Portfolio Managers to provide clients with a comprehensive fee calculation tool. This tool, covering multi-year scenarios and incorporating the high watermark principle where applicable, aims to provide clients with a clearer understanding of potential fee implications.

Apart from this, the circular mandated the inclusion of detailed fee illustrations in the PMS-client agreement and periodic reports. These illustrations cover various market scenarios, including portfolio value increases, decreases, and stagnation, providing clients with a realistic picture of fee dynamics.

There is also an introduction of a ‘Most Important Terms and Conditions (MITC)’ document. This document, to be provided to and acknowledged by all clients. It summarises critical aspects of the Portfolio Manager-client relationship, promoting clarity and understanding of their mutual rights and obligations.

Takeaway 

These recent SEBI circulars represent a concerted effort to streamline the regulatory landscape governing PMS funds, balancing flexibility with robust investor protection measures. These measures will undoubtedly shape the future of PMS India, promoting a more efficient and investor-friendly environment. 

Further, as the Indian economy continues to grow and the number of affluent individuals increases, the PMS industry is poised for further expansion. With supportive regulatory measures and increasing investor awareness, the PMS investment sector in India is well-positioned to play a crucial role in meeting the evolving investment needs of high-net-worth individuals in India.

References: 

https://www.business-standard.com/finance/personal-finance/sebi-makes-mandatory-registration-of-pms-distributor-with-apmi-know-more-124050300255_1.html

https://mas360.moneylife.in/article/sebi-eases-digital-onboarding-process-for-portfolio-managers-clients/4588.html

https://cafemutual.com/news/cafe-alt/32039-sebi-makes-digital-on-boarding-of-clients-in-pms-easy

https://www.moneylife.in/article/sebi-relaxes-digital-onboarding-process-for-portfolio-managers/74095.html

SEBI circulars

“South Indians spend a lot of money on weddings. Even though we’re present in only 4 states of the South, we’ve managed a turnover of more than Rs. 1,300 crores, that too with only a few stores in Tamil Nadu. We’re going to invest heavily in Tamil Nadu”

This is a paraphrase of a conversation we had with Bharadwaj Balaji Rachamadugu (Link), Senior Vice President at Sai Silks, a prominent South India-based saree player that houses the popular brand Kalamandir. Incorporated in 2005, the promoters chose South India as a base to start a business when they moved back from the US. Their decision stands validated as the company has smartly scaled up, premiumized its offerings, and introduced innovative formats that have been well accepted by the market. Bharadwaj’s interview echoed many a positive sentiment around the South Indian market which he’s acting on, as the company sets its eyes on Tamil Nadu, the country’s largest consumer of sarees.

A similar story replicates in the case of Indian Terrain, a menswear brand launched in 2000. Venky Rajgopal founded the brand with the vision of catering to the vibrant colours of South India and the evolving tastes of modern India. The clothing brand has capitalised on the government’s ‘vocal for local’ initiative.

This made us ponder over the peculiarities of the markets and companies from the Southern peninsula in India. Stocks from the South can be set apart for three reasons:

1. Most South Indian businesses have operated conservatively. They are fundamentally sound, their balance sheets are not over-leveraged. Take the case of the TVS group, Murugappa group and TTK group.
2. Businesses in the south typically demonstrate consistent growth, dividends, and performance, resulting in increased earnings predictability. They could serve as a reliable anchor in one’s portfolio, offering defensive stability.
3. The South Indian market has its own idiosyncrasies. As Bharadwaj told us, South Indians spend big on occasions like weddings. So much so that the saying goes, borrow or steal to get your daughter or a son married in as flamboyant a way as possible. A saying that also offers business and consequently, investment opportunities for textile companies based in the South

South India’s Textile Market

 The southern belt of India is becoming increasingly attractive for investments, with Karnataka, Andhra Pradesh, Telangana, Tamil Nadu, and Kerala leading the way in textiles. It is not unknown that threads from South India travel all across India starting from the northern belt to southern. It’s no wonder then that Coimbatore is often referred to as the Manchester of the South of India. Even before the silk saree major Nalli expanded its footprint to the east and made more people aware of its heritage, travelling all the way south for saree shopping from various parts of the country was not unusual. A study by Technopak indicated that the South India saree market is expected to touch ₹30,800 crore by FY25 growing at a CAGR of 6%.

((Source:https://www.thehindu.com/business/Industry/south-india-saree-market-likely-to-touch-30800-crore-by-fy25/article65883228.ece))

Textile mills in a quandary

However, it’s not all smooth sailing. The last couple of months have seen many mills and factories across the textile value chain shut down. Where the industry used to export 30% of the yarn produced, now it is less than 5% as per The Hindu. Exacerbating the issue is the fluctuation in cotton prices caused by high import duties and increased input costs like electricity charges which has disrupted supply of yarn, needless to say, a crucial raw material for garment production

Expansion plans

Despite the issues emanating from the cotton mills, companies like Sai Silks have massive growth plans. Sai Silks is now expanding deep into Tamil Nadu with its premium segment as well. With nine stores in the state already,  their goal is to expand to about 15 to 18 more. Sai Silks also envisions expanding more into Kerala, Karnataka, Telangana and other parts of India.

What sets apart the stocks of the south?

However, South Indian companies are known for their resilience and strong fundamentals that have historically helped them beat challenges. Companies in the south are not only strong with numbers and in assessing the need of the hour but they also believe in maintaining substantial cash reserves which aid in overcoming difficult periods. But businesses are not just susceptible to financial and operational difficulties. Legacies have ended due to familial and internal disputes. The structure of South Indian companies closely resembles that of multinational corporations that don’t draw a wall of professionalism that shields operations from the corporate drama.

Take the case of Chennai-based Murugappa Group that saw tensions boil when within Valli Arunachalam sought representation on Ambadi Investments, the holding company of the ₹74,220-crore Murugappa Group following her father’s passing. The members managed to resolve the dispute without it spilling over and affecting operations or financials.

The TVS group, one of India’s oldest and most prominent family business groups with over 110 years of history, began its journey with a unified approach. However, in late 2020, the family decided to divide the group’s businesses among its different streams formally. By early 2022, this division was legally finalised, enabling each stream of the TVS family to independently operate its businesses as separate entities. The split was executed peacefully with the businesses continuing on the path to prosperity.

But here’s the most interesting characteristic of the South Indian market – its people and their tastes. A report drafted from the summit held by the author stated how “south Indians prefer south indian brands” and that brands must not offend the audience here (https://www.exchange4media.com/marketing-news/south-indians-prefer-south-indian-brands-132138.html) This customer peculiarity gives brands emanating from the region a leg-up over others attempting to enter.

The South Indian companies offer stability and growth potential to investors, supported by their solid financial footing and strategic expansion plans and even external factors like customer loyalty which are in their favour. For these reasons we find these companies well-positioned to capitalise on growth opportunities, consumer demand and overcome challenges of varied nature thus making them compelling considerations for investment portfolios.