Unregistered firms doing portfolio management

Many unregistered firms are offering portfolio management schemes (PMS) across the country, in violation of the Securities and Exchange Board of India (Sebi) regulations. Such unregistered entities pose a threat to investor protection and the image of Indian markets being well regulated. Moreover, these entities are exposing themselves to damaging investor litigations and regulatory penal action.

According to the Sebi website, registration of firms like Arihant Capital, Baljit Securities, Anmol Group, Mideast Portfolio Management and Dawnay Day av India Advisors are still incomplete, but are already either soliciting or offering these services.

Arihant Capital has, for instance, several testimonials from clients posted on its website. A representative of Kolkata-based Baljit Securities, when contacted by FE, said it did 'unofficially' offer PMS for high net worth clients willing to invest more than Rs 5 lakh. Dawnay Day av India Advisors too, when contacted, confirmed that it offers portfolio management services.

The risks from such unauthorised retail services is not small in the current market scenario where retail investors, listed as the 'clients' category, are actually driving the stock market volumes in the face of low institutional presence. BSE (^BSESN : 16632.01 -222.92) data shows such 'clients' buy and sell shares worth Rs 2,500 crore a day, much more than foreign institutional investors or domestic institutions. Even the futures and options market is dominated by retail investors. Much of this money is from high networth individuals routed through PMS products, say market experts.

Given the scale of operations, in the event of these unregistered firms abusing the funds under their management, the markets and investor confidence will be badly affected, not to mention losses to small retail investor community. B Rajendran, deputy general manager, Sebi investor grievances, explained: "If a company is offering PMS without proper registration, then it is violating the Sebi rules. In such a case, investors can complaint to Sebi about the same, which will then take action against the company. This could include serving them with a penalty, debarring them or prosecuting them."

Lawyer, Anoop Narayanan, partner, Majmudar and Co, clarified: "Investors per se are not liable for the loss they have sustained while dealing with an unregistered PMS firm in the case of mismanagement or fraud. They can, apart from complaining to Sebi, also file a civil suit against the company to claim their money back. If there is a case of fraud involved, then they can file a criminal suit too. All three lines of actions can be taken simultaneously." But then doing all this in the current legal environment can take years on end, feel experts.

Still a redeeming feature is that the legal system technically still protects an investor, though s/he has to wage a lone battle. In case a Sebi-registered PMS service provider commits a fraud, the regulator is not seen as culpable, but would investigate into the matter and take necessary action. The solace an investor can get while dealing with a Sebi-registered service provider is that the regulator does its due diligence while allocating the certificate. Also, firms offering PMS furnish reports to Sebi on regular intervals; if discrepancies are found, Sebi seek clarification and even make periodic checks on these firms.

The lack of a systematic setup and manpower emphasises the gaping holes that exist within the regulatory framework about managing portfolios. How does Sebi find and curb the unregistered PMS firms is still unclear. But that doesn't dilute their capacity to make undue influence on the equity markets, create systemic risks.