SEBI notifies compliance to be ensured by Portfolio Managers

The Securities and Exchange Board of India(SEBI) has notified compliance to be ensured by Portfolio Managers.

The amendment to SEBI (Portfolio Managers) Regulations, 2020 (“PMS Regulations”) notified on August 22, 2022 (available at link), inter-alia mandates prudential limits on investments in associates/ related parties of Portfolio Manager, the requirement of taking prior consent of client for such investments and restrictions based on the credit rating of securities. The definitions of the terms “related party” and “associate” have been provided in the PMS Regulations. The amendment to PMS Regulations shall come into force on the thirtieth day from the date of their publication in the Official Gazette.

The Portfolio Managers shall ensure compliance with the following:

A. Limits on investment in securities of associates / related parties of Portfolio Managers

Regulation 24 (3A) of PMS Regulations inter-alia provides that the Portfolio Manager shall ensure compliance with the prudential limits on investment as may be specified by the Board. Accordingly, the Portfolio Managers shall ensure the following:

i. Portfolio Manager shall invest up to a maximum of 30 percent of their client’s portfolio (as a percentage of the client’s assets under management) in the securities of their own associates/ related parties. Further, the Portfolio Manager shall ensure compliance with the following limits:

ii. The aforementioned limits shall be applicable only to direct investments by Portfolio Managers in equity and debt/hybrid securities of their own associates/ related parties and not to any investments in the Mutual Funds.

iii. Hybrid securities includes units of Real Estate Investment Trusts (REITs), units of Infrastructure Investment Trusts (InvITs), convertible debt securities and other securities of like nature.

B. Prior consent of the client regarding investments in the securities of associates/ related parties

Regulation 22(1A) of PMS Regulations provides that the Portfolio Manager may make investments in the securities of its related parties or its associates only after obtaining the prior consent of the client in such manner as may be specified by the Board from time to time. Accordingly, the Portfolio Managers shall ensure compliance with the following:

i. Portfolio Managers shall obtain a one-time prior positive consent of client in the format specified at Annexure A (consent form), as a part of the agreement mandated under Regulation 22(1) of the PMS Regulations.

ii. The consent form shall have an option to indicate dissent, in case the client does not want to undertake any investment in the securities of associates/ related parties of respective Portfolio Manager. The client shall also have an option to specify a limit on investments in the securities of associates/ related parties of respective Portfolio Manager, below the ceiling specified in para 2 (A) (i) above.

iii. The text and figures of the consent form shall be prominently highlighted and not be below size 12 font.

iv. For new clients, the aforementioned consent shall be obtained at the time of entering into agreement, in terms of Regulation 22 (1) of PMS Regulations (i.e., at the time of onboarding of a new client).

v. For existing clients, the aforementioned consent shall be obtained by way of execution of a supplementary agreement with the clients. In cases where the agreements entered with existing clients contain provision for obtaining consent for investments through a specified mode, the same mode can be used for obtaining aforesaid prior consent for investments in the securities of associates/related parties of the Portfolio Manager as well.

vi. Portfolio Manager shall not make any investments in the securities of associates/related parties without the prior consent of the client at the time of on boarding new clients. For existing clients, fresh investments in the securities of associates/related parties of Portfolio Managers can be made only after obtaining consent from the client.

vii. In the event of passive breach of the specified investment limits, (i.e., occurrence of instances not arising out of omission and/ or commission of portfolio manager), a rebalancing of the portfolio shall be completed by Portfolio Managers within a period of 90 days from the date of such breach. Notwithstanding the same, the client may give an informed, prior positive consent to the Portfolio Manager for waiver from the rebalancing of the portfolio to rectify any passive breach of the investment limits.

viii. Such requirement of rebalancing in the event of a passive breach of investment limits shall be suitably disclosed in the consent form mentioned at para 2(B)(i) above and any waiver from the same shall also be obtained in the same document.

ix. In accordance with Regulation 27 (1) of the PMS Regulations, Portfolio Managers shall maintain records and documents pertaining to:

a) Prior positive consent or dissent, as the case may be.

b) Instances of the passive breach of investment limits, if any.

c) Steps taken, if any to rectify the passive breach of investments limits.

d) Waiver obtained from the client regarding rebalancing in the event of a passive breach of investment limits.

C. Minimum credit rating of securities for investments by Portfolio Managers

Regulation 24 (3C) of PMS Regulations provides that Portfolio Managers shall not be allowed to invest clients’ funds in unrated securities of their related parties or their associates. Further, Regulation 24 (3E) of PMS Regulations provides that the Portfolio Manager shall ensure investment of its clients’ funds on the basis of the credit rating of securities as may be specified by the Board. Accordingly, with respect to investments in debt and hybrid securities, the Portfolio Managers shall ensure compliance with the following:

i. Portfolio Managers offering discretionary portfolio management services shall not make any investment in below investment grade securities.

ii. Portfolio Managers offering non-discretionary portfolio management services shall not make any investment in below investment grade listed securities. However, Portfolio Manager may invest up to 10% of the assets under management of such clients in unlisted unrated securities of issuers other than associates/related parties of Portfolio Manager. The said investment in unlisted unrated debt and hybrid securities shall be within the maximum specified limit of 25% for investment in unlisted securities under Regulation 24(4) of the PMS Regulations.

For Official Circular Download PDF Given Below: