The Securities and Exchange Board of India (SEBI) issued Circular SEBI/HO/IMD/IMD-II/P/CIR/2026/018 on 24 January 2026, imposing a ban on performance-based fee structures for portfolio management services (PMS) with assets under management (AUM) below Rs 50 crore. The circular takes effect from 1 July 2026, giving PMS providers six months to restructure their fee agreements. This is one of the most consequential regulatory changes in the PMS industry since SEBI raised the minimum investment threshold to Rs 50 lakh in 2020.
Background and Regulatory Rationale
Performance-based fees, also called profit-sharing fees, allow PMS managers to charge a percentage of profits (typically 10-20% above a hurdle rate) in addition to a fixed management fee. While this structure theoretically aligns the manager's incentive with the investor's returns, SEBI's analysis of PMS industry data from FY22 to FY25 revealed problematic patterns. Smaller PMS operations with less than Rs 50 crore AUM charged an average total expense of 4.8% per annum, compared to 2.1% for larger managers, largely due to aggressive performance fee structures applied during bull markets.
SEBI also found that several smaller PMS managers took concentrated bets in mid-cap and small-cap stocks to maximise performance fees, exposing clients to disproportionate downside risk. The regulator noted 14 investor complaints in FY25 where performance fees were charged on unrealised gains, only for the portfolio to subsequently decline, leaving the investor worse off even before accounting for the fee.
What Changes for Investors
PMS providers below the Rs 50 crore AUM threshold will now be restricted to a fixed management fee model, capped at 2.5% per annum of AUM. Existing clients with performance-fee agreements will continue under their current terms until the agreement period expires, but renewals must comply with the new rules. PMS managers above Rs 50 crore AUM can continue charging performance fees but must adhere to the high-water mark principle, ensuring fees are only charged on net new gains above the previous highest portfolio value.
Industry Reaction
The PMS Industry Association (PMSIA) has expressed mixed reactions. Larger players like Marcellus, ASK, and Motilal Oswal PMS, all well above the threshold, view the move positively as it levels the playing field and reduces competition from fee-heavy smaller operators. However, boutique and emerging PMS managers argue the regulation stifles innovation and will force many to either merge or shut operations, reducing investor choice.
According to SEBI's own data, there are approximately 430 registered PMS providers in India, of which nearly 180 manage less than Rs 50 crore. The circular is expected to trigger consolidation, with an estimated 40-60 smaller PMS firms either exiting or merging over the next 18 months.
Implications for Retail Investors
For investors considering PMS as an alternative to mutual funds, the key takeaway is that fee transparency is improving. The fixed-fee structure provides predictability, and investors in smaller PMS operations will no longer face the risk of disproportionately high profit-sharing in rising markets followed by losses in corrections. Investors with portfolios in the Rs 50 lakh to Rs 2 crore range, who form the bulk of smaller PMS clients, stand to benefit the most. However, this change may also mean lower risk-taking by smaller PMS managers, which could reduce return potential. Investors seeking aggressive alpha generation may need to look at larger PMS operations or alternative investment funds (AIFs) with minimum tickets of Rs 1 crore.
Source
SEBI Circular SEBI/HO/IMD/IMD-II/P/CIR/2026/018