Investment Limits, Custody and Reporting to Clients

No general cap on a single stock

SEBI does not set a general limit on how much of a PMS portfolio may sit in a single stock. A portfolio can therefore be concentrated in a small number of holdings. Where a manager does observe a limit, it is the manager's own policy, not a SEBI rule.

Concentration cuts both ways. The larger one holding is, the more its rise or fall moves the whole portfolio. This is one of the main risks of PMS, alongside market risk and dependence on the manager's decisions.

Limits on the manager's associates and related parties

Although there is no general single-stock cap, SEBI does set specific limits. One set applies to securities of the portfolio manager's own associates and related parties: 15% of the client's assets in a single associate, 25% across associates and 30% in total. These limits do not apply to advisory services. Another, described below, applies to unlisted securities. These are not the only limits in SEBI's rules: the Master Circular also restricts, for example, some lower-rated and unrated debt.

These limits deal with a situation in which the manager's own interests are involved: client money going into securities of entities connected with the manager itself. SEBI caps how much of a client's assets can go there.

Unlisted securities

Unlisted securities are also limited. For non-discretionary and advisory services, they may make up at most 25% of assets under management. Up to 100% is allowed for large-value accredited clients and for co-investment portfolio management.

An unlisted security has no exchange price and no ready market. It can be hard to value and hard to sell, which adds liquidity risk to the usual market risk.

Custody and reporting

Clients' securities are held by a custodian (a manager providing only advisory services is exempt from appointing one). The custodian keeps them in safekeeping while the client remains their owner. Custody is about safekeeping. It does not protect the securities' market value.

The manager must send each client a report at least once a quarter and an audited statement of the account every year. A client may also ask for a report when one is needed. None of these carries any assurance about the future.

Rules at a glance

Key points

• SEBI sets no general cap on a single stock in a PMS portfolio; any such limit is the manager's own policy.
• SEBI limits holdings in the manager's associates and related parties: 15% of the client's assets in one, 25% across them, 30% in total; these limits do not apply to advisory services.
• Unlisted securities: up to 25% of assets under management for non-discretionary and advisory services; up to 100% for large-value accredited clients and co-investment PMS.
• A custodian holds the securities, and the client remains the owner.
• Clients get a report at least quarterly and an audited statement every year.

Common misunderstandings

• It is wrong to say SEBI caps every PMS holding at a fixed percentage: there is no general single-stock cap, and any such limit is the manager's own policy.
• The 15%, 25% and 30% limits are not diversification rules for the whole portfolio: they apply only to securities of the manager's associates and related parties.
• An AIF is not the only regulated route to unlisted securities: non-discretionary and advisory PMS may hold them up to 25% of assets under management.

Questions people ask