Portfolio Manager to Obtain Prior Approval of SEBI in Case of Change in Control

Swetha Dhinesh

20 Mar, 2023

According to Regulation 11(aa) of the SEBI (Portfolio Managers) Regulations, 2020, a Portfolio Manager must first acquire SEBI’s prior consent before changing the control of a company in the way SEBI may specify. The process for getting prior approval in case of a change in control of Portfolio Managers was laid down in Vide Circular of SEBI and was updated recently on January 10, 2023.

The planned change in control of a portfolio manager was approved more quickly by capital markets regulator Sebi. In accordance with this, the regulator has outlined the process that PMs must take in instances involving scheme(s) of arrangement that requires National Company Law Tribunal sanction (NCLT).

Who is a Portfolio Manager?

A portfolio manager is a legal entity that, in accordance with a contract or other agreement with a client, advises, directs, or otherwise takes on behalf of the client the management or administration of a portfolio of securities or the client’s assets. 

A portfolio is a grouping of investments, such as stocks, bonds, cash and cash equivalents, trade funds, closed-end funds, and so forth. Because managing a portfolio can be difficult and time-consuming, the investor hires a portfolio manager to handle it.

Before engaging in the requisite activities, the corporate body must first register with SEBI as a portfolio manager in accordance with SEBI requirements. The SEBI (Portfolio Managers) Rules, 1993^[1], contain the requirements.

Functions of portfolio managers 

The following describes the portfolio manager’s function.

• Making decisions on investments on the client’s behalf to ensure that they receive the highest returns possible for their investments.
• Developing investment plans and overseeing portfolios.
• Figuring out the client’s income, age, and risk tolerance to determine the appropriate investing strategy.
• Providing the client with information on the numerous investment opportunities present in the financial sector.

Eligibility of Portfolio Manager Registration with SEBI

The following eligibility requirements must be met in order for portfolio managers to register with SEBI:

• The applicant must hold a professional degree in accounting, business management, law, or finance from a university, an institution recognised by the Central Government, any State Government, or a foreign university.
• The applicant must have a minimum of ten years of experience in securities market-related roles as a stockbroker, portfolio manager, or fund manager.
• The CFA Institute’s CFA charter.
• The candidate must satisfy the capital requirement of INR 2 CR.
• The candidate must possess the necessary facilities, including staff, offices, and equipment, to carry out the portfolio manager’s duties effectively.
• The applicant must disclose any information about disciplinary actions taken against them, the denial of prior applications they had submitted, or involvement in any legal proceedings.
• The candidate ought to be a fit and proper individual.

Benefits of portfolio management services 

The benefits of choosing these services are described below.

• The professional opinion of your investment
  Using a portfolio management service has many advantages, one of which is knowing that your investment is in professional hands. The portfolio managers that have been assigned to you are professionals who know how to handle volatile markets. They’ll effectively manage your portfolio and work to raise your profit margin gradually.
• Management of investment portfolios on an individual basis
  Managers are in charge of managing all of their client’s assets and securities and have the authority to act on behalf of investors in personal investment transactions.
• Individual investment plans
  Your financial goals inform the investing strategies that the portfolio managers customise. Afterwards, they adjust the plan in light of your age, risk tolerance, budget, and income.
• Nominal Charges
  The typical fee allotted for portfolio managers is a proportion of the assets they are responsible for. The transparent fee levied by the Managers is less than the costs associated with the distribution or retail management. This increases the value of hiring a portfolio manager.
• Effective risk management
  The main objective of a portfolio manager works to increase returns while decreasing the risk management of your investment. They concentrate on spreading out the risk so that you won’t lose money when market trends alter.
• Regular observation
  A portfolio manager will closely monitor each asset’s performance and the regular returns produced. Your investment is changed to achieve your financial goals based on this analysis.
  You may enjoy your investments while you sit back and relax with the Portfolio Management Service.
• Transferring accountability
  The investor may find it challenging to handle the management of large securities or investments. It requires a considerable amount of time and effort. Additionally, portfolio managers have a fiduciary duty to behave honestly, in good faith, and with consideration for the client’s best interests. In comparison to the fees they charge, the hassle-free approach and time savings provided to business clients are highly significant.

Regulation to obtain prior approval of SEBI in case of change in control

Portfolio managers will now be required to seek the capital markets regulator’s prior authorisation in the event of a change in control, according to new rules announced by Sebi. The following are the specified regulation procedures that need to be followed by the portfolio managers.

• According to the regulator, the market regulator must receive an online application for prior clearance using the Sebi Intermediary Portal. The regulator’s prior authorisation is valid for a duration of six months.
• Also, Sebi must receive applications for new registration following a change in control within six months of the prior approval date.

• According to the prior approval granted by Sebi, the portfolio manager is required to inform its existing investors about the proposed change prior to enacting it and provide an option to exit without any exit load within a period of at least 30 calendar days from the date of such communication, in order to enable existing investors to take an informed decision regarding their continuation or otherwise with the changed management. However, For the clients under co-investment portfolio management services, the Portfolio Manager shall ensure compliance with the second proviso of Regulation 22 (2) of PMS Regulation.

• Prior to submitting the application to NCLT, the portfolio manager must make sure that the Sebi application seeking authorisation for the planned change in control has been lodged.
• In accordance with the requirements of the Companies Act of 2013, the Portfolio Manager shall ensure the following in matters requiring a scheme (s) of arrangement that requires the National Company Law Tribunal’s (“NCLT”) sanction.

1. Before submitting the application to NCLT, the application seeking SEBI’s permission for the proposed change in control under Regulation 11(aa) must first be submitted.
2. SEBI will issue in-principle approval if it is satisfied that the necessary regulatory requirements have been met; 
3. The validity of this in-principle approval shall be for three months from the date of such approval, during which time the relevant application shall be presented to NCLT;
4. The Portfolio Manager must submit an online application in accordance with paragraph 2(i) of this Circular and the accompanying papers to SEBI for final approval within 15 days of the date of the NCLT order.

• A copy of the NCLT order approving the plan.
• A copy of the approved scheme.
• A statement describing any modifications made to the approved scheme from the draft scheme and the reason for those modifications.
• Information provided by SEBI on how the requirements and observations indicated in the in-principle approval have been complied with.

1.  The procedures for requesting prior approval for a change in control of Portfolio Managers are outlined in paragraphs 2(ii) – (iv) of this Circular. All other rules are also applicable.

• To protect the investors interest in the securities market, to encourage the development of the securities market, and to regulate the securities market, this circular is being issued to the authority granted under Section 11(1) of the (SEBI) Securities and Exchange Board of India Act, 1992, as read with Regulation 43 of the SEBI (Portfolio Managers) Regulations, 2020.

Conclusion

To accomplish the investor’s financial goal, the portfolio manager develops plans and strategies. They receive excellent compensation for handling the clients. Before beginning to work on the portfolio, the portfolio manager and investor have a thorough conversation about the client’s goal and what can be accomplished with the resources at hand.

Also Read:
Portfolio Management Services- A Budding Business
Difference Between Portfolio Management and Mutual Fund