Wednesday, Dec 06, 2023

Sebi Caps PMS Investment In Securities of Related Parties, Bats For Proper Disclosure

Outlook Money

Sebi Caps PMS Investment In Securities of Related Parties, Bats For Proper Disclosure

A portfolio management service (PMS) provider will soon need to disclose details of investment in securities of related parties

SEBI notified frameworks regarding investments by portfolio management scheme (PMS) service providers.

The Securities and Exchange Board of India (Sebi), in a circular released on August 26, has notified frameworks regarding investments by portfolio management scheme (PMS) service providers. The move will ensure proper disclosure to investors, cap over-exposure to investments in securities of related parties and ensure most of the investments are done in quality securities.

The amended frameworks for PMS providers will come into effect from September 20.

These rules will, however, not be applicable for advisory portfolio management services, co-investment portfolio management services companies, and those companies that manage funds under government mandates.

Munish Randev, founder and CEO, Cervin Family Office and Advisors, said in a statement, “We always welcome regulations that safeguard the interests of the investor, both large or small. The new rules allow the investor more control over any 'conflicted investments' by the PMS manager.  We are just worried that some managers may just sneak in the initial approval for related party investments in the paperwork for new clients without clearly highlighting that to the client."

"More importantly, we would also like to see some similar regulations for the PMS-advisory platform. That platform already bypasses the stricter 'investment advisory regulations (RIA) and a lot of related parties or inhouse manufactured products are included in the client portfolio (in most cases inhouse manufactured AIFs) with an intent to garner larger management fees, profit share, others, beyond the PMS advisory fees charged. So while at the PMS advisory level they may offer a cheaper option, they make up by investing in the group or associated company-manufactured products," added Randev.

Here are the amended frameworks that Sebi has notified:

Limits On Investment In Securities Of Associates/Related Party

Sebi, in the circular, said that portfolio managers shall invest up to a maximum of 30 per cent of their client’s portfolio in the securities of their own associated or related party.

Sebi further classified and laid down limits for individual securities.

In the equity asset class, the limit for investment in a single associated or related party shall be 15 per cent of the client’s assets under management (AUM). The limit for investment across multiple associates or related parties shall be 25 per cent of the client’s AUM.

For debt and hybrid securities, the limit for investments in a single associated or related party shall be 15 per cent, and for multiple associates or related parties, 25 per cent.

As per the classification of Sebi, hybrid securities include real estate investment trusts (REITs), infrastructure investment trusts (InvITs), convertible debt securities and other securities of similar nature.

The overall limit for equity, debt and hybrid securities shall be 30 per cent.

The limits mentioned “shall be applicable only to direct investments by Portfolio Managers in equity and debt/hybrid securities of their own associates/related parties and not to any investments in the Mutual Funds”, specified Sebi.

According to Raghvendra Nath, MD, Ladderup Wealth Management, a company which provides portfolio management services, "As we know, this limit is applicable for direct investments by portfolio managers in equity, debt and hybrid securities. Any such regulations which are investor friendly should always be welcomed. Since portfolio managers must take prior consent of the client before making investments, client will also be well aware of where their money is parked." 

Prior Consent Of Clients

To be able to make investments in the securities of associates or related parties, portfolio managers will need the prior consent of the client at the time of onboarding. Even for existing clients, fresh investments in such securities can be made only after obtaining consent from the client.

Sebi made it clear that the consent form should also “have an option to indicate dissent”.

Portfolio managers will need to document the following records related to consent:

a) Prior positive consent or dissent, as the case may be.

b) Instances of the passive breach of investment limits, if any.

c) Steps taken, if any, to rectify the passive breach of investment limits.

d) Waiver obtained from the client regarding rebalancing in the event of a passive breach of investment limits.

"Needless to say that all such investor-friendly regulations need to be well-communicated so that all types of investors can benefit from better regulations," said Randev in a statement.

Credit Rating of Investments By Portfolio Managers

Portfolio managers shall not be allowed to invest funds of their clients’ funds “in unrated securities of their related parties or their associates”.

Both in case of discretionary and non-discretionary portfolios, managers shall not make any investment in below investment grade securities, said the circular.

However, managers 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.”

"Such mandated prudential limits on investments will ensure high credit quality investments," added Nath.


Portfolio managers will have to provide their clients with a disclosure document with all the details of investments in related parties or associates, rectification policy and credit ratings of investments in debt and hybrid securities.


Additional inputs from Neelanjit Das