SEBI lays the framework for investment by portfolio managers in securities of related party entities

The Securities and Exchange Board of India (SEBI) has issued a framework for investing clients’ funds by Portfolio Management Scheme (PMS) service providers in unrated securities of their associates or related party entities.

As per the amended framework, the Portfolio Manager should obtain the client’s prior consent in such manner as the Board specifies, if they intend to invest the client’s funds in the securities of their related parties or associates. The requirement to obtain consent shall not apply to those portfolio managers as specified by SEBI. 

The portfolio manager will have to disclose details of the investment of the client’s funds in the securities of its associates and related parties and details of its diversification policy.

At the client level, the portfolio managers must ensure compliance with the prudential limits on investments as specified by the regulator. They will have to put in place an alert-based system to monitor compliance with the same.

The regulator defined “associate” as a body corporate in which a director or partner of the portfolio manager holds, either individually or collectively, more than 20 per cent of its paid-up equity share capital or partnership interest.

A related party to a portfolio manager has been defined as-

• key managerial personnel or his relative;
• a firm in which a director, partner, manager of the portfolio manager or his/her relative is a partner;
• a private company in which a partner, director or manager of the portfolio manager or his/her relative is a member or director;
• a public company in which a partner, director or manager or the portfolio manager is a director or holds along with his/her relatives more than 2% of its paid-up share capital;
• a holding, subsidiary or an associate company of the portfolio manager.

SEBI is expected to come up with specifics regarding the prudential limits and the process for seeking approval from investors for these investments soon.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@clear.in