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Assessment of SEBI (Portfolio Managers) (Amendment) Regulations, 2022

On 22nd August 2022, vide notification number SEBI/LAD-NRO/GN/2022/94, the Securities and Exchange Board of India (SEBI) issued a notification wherein SEBI made some amendments to Portfolio Managers Regulations vide the SEBI (Portfolio Managers) (Amendment) Regulations, 2022. The amendments have been brought to regulate the investments made by the portfolio managers of their clients in the securities of their related parties and their associates.

Who are Portfolio Managers?

Portfolio managers are body corporates who enter into a contractual relationship with their clients to advise them, direct them, or undertake on their behalf the management or administration of their securities of goods or funds.

Highlights of SEBI (Portfolio Managers) (Amendment) Regulations, 2022

These amendments have been made in the existing Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020. Following are the amendments:

New Clause on Related Parties

SEBI has inserted a new clause (pa) after Regulation 2(1)(p). This new clause adds the concept of “related party” in relation to the portfolio manager, which includes the following parties within its ambit:

1. A director or partner or his relative;
2. Key managerial personnel (KMP) or his relative;
3. A firm where a Partner, Director, Manager or his relative is a Partner;
4. A Private Company where a Partner, Director or Manager, or his relative is a member or Director;
5. A Public company where a Partner, Director or Manager is a Director or holds along with its relatives more than 2% of its paid-up share capital;
6. A Body corporate whose board of directors (BOD), Managing Director (MD) or manager is accustomed to acting as per the advice, instructions or directions of a partner, Director or manager;
7. Any person on whose advice, instructions or directions a partner, Director or manager is accustomed to act;
8. A body corporate that is a:

(A) A holding, associate or subsidiary company of the portfolio manager; or

(B) A subsidiary of a holding company to which the portfolio manager is a subsidiary;

(C) An investing company or the venture of the portfolio manager;

• A related party defined under the applicable accounting standards;
• Such other person specified by the board

Prior Consent from Clients before Investments

The Notification has also inserted a sub-regulation and two sub-clauses in Regulation 22(1A) and clauses (da) and (db) of Regulation 22(4). They are as follows:

1. Sub Regulation (1A) states that portfolio managers must take prior permission from their clients before investing in the securities of their related parties or associates. They must obtain such permission in the manner prescribed by SEBI from time to time.
2. According to clause (da), the Disclosure Document must contain the details of the investment of the client’s funds made by the portfolio manager in the securities of its related parties or associates.
3. According to clause (db), the Disclosure Document should also contain the details of the diversification policy adopted by the Portfolio manager.

Compliance with Prudential Limits on Investments

The Notification has also inserted the following sub-regulations after Regulation 4(3):

1. (3A): The portfolio managers are required to ensure compliance with the prudential limits imposed on the investment specified by SEBI from time to time.
2. (3B): These prudential limits will be applicable at the client level when portfolio managers make investments.
3. (3C): The portfolio managers are prohibited from investing their client’s funds in the unrated securities of their related parties or associates.
4. (3D): The portfolio managers must implement an alert-based system that monitors compliance with prudential investment limits.
5. (3E): The portfolio managers can make investments of their client’s funds only in accordance with the credit rating of securities issued by SEBI from time to time.

Model Disclosure Document for Portfolio Management

The SEBI (Portfolio Managers) (Amendment) Regulations, 2022 have further added heads in the Model Disclosure Document for Portfolio management provided under Schedule V of the Regulations, 2020. These additional heads have been inserted after clause 14 of the schedule:

1. 15) Details of the investments in the securities of related parties of the portfolio manager: Here, the portfolio managers are required to put in the details of their investments of the client’s funds in the securities of their related parties and their associates
2. 16) Details of the diversification policy of the portfolio manager: The portfolio managers are also required to provide the details of the diversification policy adopted by them for the portfolio of their clients.

Implementation of the SEBI (Portfolio Managers) (Amendment) Regulations, 2022

The SEBI (Portfolio Managers) (Amendment) Regulations, 2022 introduced by this Notification shall come into effect on the 30th day from the date of publication in the Official Gazette. Since the Notification came on 22nd August 2022, the enactment date of these amendments will be 21st September 2022.

Conclusion

The SEBI (Portfolio Managers) (Amendment) Regulations, 2022 have been introduced in the exercise of the powers conferred on SEBI under Section 11(1) and Section 12(1) of the SEBI Act, 1992^[1] to promote the development and regulate the securities market and also to protect the investors’ interest in the securities market.

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