Markets regulator Sebi on Friday said portfolio managers can invest a maximum of 30 per cent of clients’ assets in the securities of their “associates” or related parties.
This came after Sebi amended portfolio managers’ rules on Monday that mandated prudential limits on investments in associates and related parties of portfolio managers, the requirement of taking prior consent of clients for such investments and restrictions based on the credit rating of securities.
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.
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In a circular, the Securities and Exchange Board of India (Sebi) said “portfolio managers shall invest up to a maximum of 30 per cent of their client’s portfolio (as a percentage of the client’s assets under management) in the securities of their own associates/related parties.” With regard to investment in equity and debt and hybrid securities, the regulator has fixed a limit of 15 per cent each for investment in a single associate or related party, while the same has been set at 25 per cent for investment across multiple associates or related parties.
The limits will be applicable only to direct investments by portfolio managers in equity and debt or hybrid securities of their own associates or related parties, and not to any investments in the mutual funds.
Portfolio managers may make investments in the securities of a related party or associate only after obtaining a one-time prior consent of the client. The consent needs to be taken in a specified format.
In the event of passive breach of the specified investment limits, a rebalancing of the portfolio will have to be completed by portfolio managers within a period of 90 days from the date of such breach.
Portfolio managers will have to maintain records and documents pertaining to prior consent or dissent, instances of the passive breach of investment limits, steps taken to rectify the passive breach and waiver obtained from the client regarding rebalancing in the event of a passive breach of investment limits.
Sebi also said portfolio managers offering discretionary and non-discretionary portfolio management services will not be allowed to invest clients’ funds in below investment grade securities of their related parties or their associates.
“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 per cent of the assets under management of such clients in unlisted unrated securities of issuers other than associates/related parties of portfolio manager,” Sebi said.
It further said the investment in unlisted unrated debt and hybrid securities will be within the maximum specified limit of 25 per cent for investment in unlisted securities.
Also, Sebi said a portfolio manager will have to provide the client with a disclosure document containing details of the investment of the client’s funds by it in the securities of its related parties or associates and the details of its diversification policy.
The regulator clarified that these rules will not be applicable for advisory portfolio management services, co-investment portfolio management services and for client categories who in turn manage funds under government mandates.
For advisory portfolio management services, Sebi said portfolio managers will have to make suitable disclosure to the client regarding conflict of interest with respect to investments in the securities of the associates/related parties, while giving advice.
The new framework will come into effect from September 20.