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SEBI introduces new conditions for investments by portfolio managers

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Securities and Exchange Board of India vide a notification dated 22.08.2022 has amended SEBI (Portfolio Manager) Regulations, 2022 with the objective to regulate investments of portfolio managers in related parties and to ensure that such investments are made on sound financial footing. The idea is to bring hygiene in the industry by making sure that there is no disparity and conflict of interest of one set of clients over another. These amendments have been introduced by SEBI to ensure that investment decisions of portfolio managers does not lead to overexposure of clients’ portfolios towards a particular group and that the investment decisions made by portfolio managers are diverse and in the best interest of their clients.

The amendments have introduced a comprehensive definition of related party in the regulations. The amendments have further provided that in case of any investment in related parties or its associates, the portfolio managers shall obtain prior consent of the clients and the manner for the same shall be specified by SEBI. A circular prescribing the format and details is awaited. The amendments introduces new disclosures with respect to investment of client funds made in related parties or its associates as well as the diversification policy formulated by the portfolio managers.

The amendments also provide that the portfolio managers shall comply with the investment limits, as shall be specified by SEBI, while making investments. Further, these prudential limits shall be applicable at the client level at the time of making such investments and no investment should be made in unrated securities of related parties or its associates. To ensure these conditions portfolio managers have now been mandated to put in place an alert based system to monitor compliance limits as mandated by SEBI.

This also comes in the wake of certain regulatory experiences, including through inspections, and complaints. From the investment portfolios managed by portfolio managers, SEBI observed

that certain portfolio managers have invested a significant percentage of their client’s funds in their own associates/related parties. This was also validated by an internal working group. From a policy perspective, such an amendment is a welcome measure.

Regstreet Law Advisors team would be happy to hear the views of the readers on the sufficiency of these measures to meet the desired objectives on info@regsla.com.

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