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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:
Table of Contents
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:
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.
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:
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
Equity + Debt + Hybrid securities
30%
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:
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:
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 13th 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 13th 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:
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 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)
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
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:
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
The mandate of this circular on Portfolio Managers compliance shall come into effect from 20th 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.
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
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