SEBI

SEBI issues Circular on Portfolio Managers Compliance

On 26th August 2022, vide circular number SEBI/HO/IMD/IMD-I/DOF1/P/CIR/2022/112, guidelines were issued by the Securities and Exchange Board of India (SEBI) to the Portfolio Managers wherein certain compliance to be met by them in pursuance of the amendments in the Portfolio Managers Regulations, 2020. This circular is related to the prudential limits on investments in the securities of associates/related parties, taking prior consent of their clients before making investments, the introduction of the terms “related party”,  “associate”, and restrictions based on the credit rating of securities. Following are the Portfolio Managers compliance that is supposed to be complied:

Entities to whom the circular on Portfolio Managers compliance is applicable

The Circular on the “Portfolio Managers compliance” apply to all the Portfolio Managers.

However, the requirements specified below and in Regulations 22(1A), 22(4)(da) & (db), 24 (3A)  to 3(E) of the Portfolio Managers Regulations shall not be applicable to:

• Advisory portfolio management services;
• Co-investment portfolio management services; and
• Client categories

that manage funds under the government’s mandate and specific Acts of Parliament.

Further, the Advisory portfolio management services and Portfolio Managers are required to disclose to the clients any conflict of interest with respect to the investment in the securities of the associates/related parties at the time of advising them. Moreover, the Portfolio Managers are required to disclose the credit rating of all securities at the time of advising them.

Highlights of the Circular on Portfolio Managers compliance

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

According to Regulation 24(3A) of the Portfolio Managers Regulations, 2020^[1], Portfolio Managers have to ensure compliance with the prudential limits on the investment specified by SEBI. Following are the limits that Portfolio Managers need to comply with:

• Portfolio Managers can invest a maximum of 30 percent of their client’s portfolio (as the percentage of the client’s assets under management) in the securities of their related parties/associates. Further, the following limits should also be kept in mind:

Security	Limit for investment in single associate/related party (as a percentage of client’s AUM)	Limit for investment across multiple associates/related parties (as a percentage of client’s AUM)
Equity	15%	25%
Debt and hybrid securities	15%	25%
Equity + Debt + Hybrid securities	30%

• The above mentioned limits are applicable to the direct investments made by the Portfolio Managers in debt/hybrid and equity securities of their related parties/associates. They do not extend to the investments made in Mutual Funds.
• The hybrid securities comprise units of the Infrastructure Investment Trusts (InvITs), units of Real Estate Investment Trusts (REITs), convertible debt securities and securities of similar nature.

Taking client’s prior consent before making an investment in the securities of related parties/associates

According to Regulation 22(1A) of the Portfolio Managers Regulations, a Portfolio Manager must obtain its client’s prior consent before investing in the securities of its related parties or associates. The Portfolio Manager is required to obtain its client’s consent in the following manner:

1. A Portfolio Manager is required to obtain the one-time prior consent of the client in the format mentioned in Annexure A (consent form) as part of the agreement mentioned in Regulation 22(1) of the Portfolio Managers Regulations.
2. The consent form needs to have an option of indicating dissent by the client in case the client doesn’t want the Portfolio Manager to make an investment in the securities of the manager’s related parties/associates. Additionally, an option should also be provided to the client to indicate the limit on the investment to be made in the securities of the respective Portfolio Manager’s related parties/associates, as mentioned above.
3. The figures and text in the consent form should be clearly highlighted and should not be below the font size of 12.
4. As for the new clients, consent must be obtained at the time of entering into the agreement as per Regulation 22(1) of the Portfolio Managers Regulations (i.e. at the time of onboarding a new client).
5. For the existing clients, consent can be obtained by entering into a supplementary agreement with the client. Where the agreements have already been entered into with the client, and the agreement contains the provision of obtaining prior consent from the client through a specified mode, the same mode shall be used for obtaining the prior consent of the client before making the investment in the securities of the Portfolio Manager’s associates/related parties. 
6. The Portfolio Manager is not supposed to invest in the securities of its related parties/associates without obtaining the client’s prior consent at the time of onboarding new clients. In the case of the existing clients, fresh investments in the securities of related parties/associates of the Portfolio Manager can only be made after obtaining consent from such clients.
7. In the event of a passive breach of the specified investment limits (i.e. breach happening not as a result of omission and/or commission by the portfolio manager), the Portfolio Manager is required to complete rebalancing of the investment portfolio within 90 days from the date of such breach. Moreover, the client may give informed, prior positive consent to the Portfolio Manager for a waiver for the rebalancing of the portfolio to rectify any violation of the investment limits. 
8. The obligation of rebalancing in any instance of a passive breach of investment limits shall be disclosed in the consent form. Further, any waiver regarding such rebalancing shall also be obtained in the same form.
9. According to Regulation 27(1) of the Portfolio Managers Regulations, the Portfolio Managers are required to maintain the following records and documents relating to:

• Prior positive consent or dissent of the client
• Instances of passive breach of investment limits, if any
• The portfolio manager took steps to rectify such breach of investment limits
• Waiver obtained from the client regarding rebalancing of the portfolio in the event of a passive breach of investment limits

Need for minimum credit rating of securities for investments by the Portfolio Managers

According to Regulation 24(3C) of the Portfolio Managers Regulations, the Portfolio Managers have been restricted from investing the clients’ funds in unrated securities of their related parties or associates. Further, as per Regulation 24(3E) of the Portfolio Managers Regulations, the portfolio managers have to ensure that the investment of the client’s funds is made based on the credit rating securities specified by SEBI. Accordingly, the Portfolio Managers have to ensure compliance with the following while making investments in debt and hybrid securities:

1. The Portfolio Managers that offer discretionary portfolio management services are supposed to make investments in the below investment grade securities.
2. The Portfolio Managers that offer non-discretionary portfolio management services are supposed to make investments in the below investment grade listed securities. However, the Portfolio Managers have the option to invest upto 10% of the assets under management of such clients in unlisted unrated securities of the issuers other than associates/related parties of the Portfolio Managers. Such investment in the unlisted unrated debt and hybrid securities cannot exceed the maximum limit of 25%investment in the unregistered securities under Regulation 24(4) of the Portfolio Management Regulations.

Disclosure of details of the investment made by the Portfolio Managers

I. Periodic Reports to the clients

a. The Portfolio Managers are required to disclose the following details in the periodical report that is required to be furnished to the clients as per Para 12 of the SEBI circular number SEBI/HO/IMD/DF1/CIR/P/2020/26 that was released on 13^th February, 2020:

i. The details of the investment of the client’s funds in the securities of the associates/ related parties of the Portfolio Manager.

ii. The details of the incidents of passive breach of the investment limits committed at the end of the Portfolio Manager and the consequent steps taken by the Portfolio Manager to rectify the same.

iii. The details of the credit ratings of investments in hybrid and debt securities.

b. To accommodate the above mentioned changes, a revision has been made in the format for client reporting provided under Annexure B of the aforesaid circular dated 13^th February 2020.

The format given in annexure B has been revised to include the following tables.

Investments in the securities of the Associates/ related parties of the Portfolio Manager:

• Transaction wise

Serial No.	Issuer name	Type of security	ISIN	Transaction wise Details
				Transaction date	Buy/Sell	Quantity	Gross transaction value (INR in crores)	Net transaction value (INR in Crores)

• Security wise

Serial No.	Issuer name	Type of security	ISIN	Security wise details
				Investment amount (cost of investment) as on the last day of the previous quarter (INR in crores)	Value of investments as on the last day of the previous quarter (INR in crores)	percentage of client’s AUM as on the last day of the previous quarter (INR in crores)	percentage of PM’s AUM as on the last day of the previous quarter (INR in crores)

• The details of the passive breach of investment limits:

Serial No.	Details of the passive breach	Date of Passive breach	Details of steps  taken, if any, to rectify the passive breach of limits	Date of rectification	Whether rectified within 90 days

• Details of credit ratings of investments made in the hybrid and debt securities:
• Disclosure Document

Regulation 22(4)(da) & (db) of the Portfolio Managers Regulations obligates a Portfolio Manager to disclose in the Disclosure document all the details of its diversification policy and details related to the investment of the client’s funds made by the Portfolio Manager in the securities of its associates/ related parties. The Portfolio Manager has to ensure the following compliance:

• The disclosures related to the details of the investment of the client’s funds in the securities of the associate/ related parties shall be reflected in the Disclosure Document under the head “Details of the investments in the securities of related parties of the Portfolio Manager” in the following format:

Serial No.	Investment Approach, if any.	Name of the associated party/ related party	Investment amount (cost of investment) as on the last day of the previous calendar quarter (INR in crores)	Value of investment as on the last day of the previous calendar quarter (INR in crores)	percentage of total AUM as on the last day of the previous calendar quarter

• It is incumbent on the Portfolio Managers to update any material changes regarding the above information in the Disclosure document, and the same should be uploaded on their websites within 7 days.

Date of coming into effect

The mandate of this circular on Portfolio Managers compliance shall come into effect from 20^th September 2022 onwards, and the above mentioned requirements related to the disclosure of details of the investments made by the Portfolio Managers shall come into effect from the quarter ending September 2022.

Conclusion

This Circular on Portfolio Managers compliance has been issued with the approval of the competent authority and has been brought after exercising the powers conferred on SEBI under sub-section 1 of s. 11 of the SEBI Act, 1992 read with Reg. 43 of SEBI (Portfolio Managers) Regulations, 2020. To promote the development of the securities market and protect the interests of the investors in the securities market. 

Read our Article: Assessment of SEBI (Portfolio Managers) (Amendment) Regulations, 2022