The Securities and Exchange Board of India may ask the mutual fund industry to categorise funds where a substantial portion of the corpus is held by a single investor as a portfolio management scheme (PMS). According to industry estimates, around 176 mutual fund schemes are virtually running as a PMS.

Sebi has often expressed concern that certain mutual fund schemes have been treated as a PMS by a single large investor.

The Association of Mutual Funds of India had recommended that each scheme should have at least 20 investors. However, according to industry insiders, even with this minimum figure it is possible for one or two large investors to corner the bulk of the corpus.

A direct fallout of Sebi's concern with single investor schemes is that it is frowning on institutional plans. Some mutual funds that had filed draft prospectuses with the regulator for such plans in recent months have not yet got approval for them.

When Sebi put a stop to rebating -- the practice of paying commissions to investors for putting money into fund schemes -- the fear of withdrawal of large investors made fund houses launch special plans for institutional clients. The expense ratio in these schemes was also lower than for other schemes that have a good retail investor base.

However, there is a real threat of these institutional plans degenerating into single investor schemes. Sources said the regulator was currently going slow on such plans before resolving the contentious issue.

On PMS, sources familiar with developments said there was a strong possibility that Sebi would designate schemes where a single investor held more than a certain portion of the corpus as a PMS. The minimum limit would be decided later.

Designating a scheme as a PMS would mean complying with the regulations on a PMS. A PMS has a Rs 50 lakh (Rs 5 million) capital adequacy requirement. Also, the portfolio manager will have to enter into an agreement with the client setting out each other's rights, liabilities and obligations relating to the management of funds or portfolio of securities.

The agreement will have to clearly lay down the investment strategy, including the type of securities in which the scheme can invest and the maximum amount of exposure to different categories of assets.

These guidelines are, therefore, relatively more strict than for mutual funds where the prospectus contains only the broad investment guidelines but has no agreement between the asset management company and the investor.

In PMS, the client can actually dictate the areas of investment and impose restrictions, along with the tenure of the portfolio investments.

The portfolio manager and the client also have to settle the fees the client has to pay. In a mutual fund scheme, separate fees do not have to be paid and everything is clubbed together under the asset management fees which the schemes pay to the asset management company.

A single investor who contributes a huge corpus to the scheme is advantageous to a fund because the servicing costs will be lower.

Fund houses have not been happy with the regulator's insistence on a minimum investor base for each scheme as they feel that it should be left to investors to decide whether they want to put money into a scheme and how much.