This blog provides a structured overview of SEBI’s compliance framework for portfolio investments, covering investment restrictions, permissible securities, credit rating mandates, and related-party transaction limits.
March 02, 2024
Investment Restrictions for Portfolio Managers
1. Corporate Bonds & RFQ Compliance
✔ Mandatory Exchange Transactions – Portfolio Managers must execute at least 10% of their total secondary market trades in corporate bonds through the Request for Quote (RFQ) platform of stock exchanges.
✔ Rolling Three-Month Compliance – The 10% trading requirement is calculated on a rolling basis, considering the current month and the preceding two months.
✔ Self-Trades Disclosure – If a Portfolio Manager is on both sides of a transaction, the trade must be executed via RFQ in One-to-One (OTO) mode.
Example: If a Portfolio Manager trades ₹100 crore in corporate bonds over three months, at least ₹10 crore must be executed via RFQ mode.
2. Investment in Derivatives
✔ Allowed for Hedging & Portfolio Rebalancing – Portfolio Managers can invest in derivatives only for hedging or rebalancing portfolios, not for speculative purposes.
✔ Exposure Limits – Total exposure in derivatives must not exceed client funds placed with the Portfolio Manager.
✔ Client Agreement Required – The Portfolio Management Agreement must clearly specify:
Type of derivatives allowed.
Maximum exposure limits (both absolute and percentage-based).
Risk management framework for derivative transactions.
3. Participation in Commodity Derivatives
✔ PMS Can Trade in Commodity Derivatives – Portfolio Managers can participate in Exchange-Traded Commodity Derivatives (ETCDs) on behalf of clients.
✔ Custodian Requirement – PMS firms must appoint a SEBI-registered Custodian before transacting in commodity derivatives.
✔ Physical Settlement Rules – If a PMS takes physical delivery of a commodity, it must be liquidated within a pre-agreed timeline to avoid client risk exposure.
✔ Foreign Portfolio Investors (FPIs) – If PMS firms onboard FPIs, they must ensure full compliance with SEBI’s FPI trading restrictions in commodity derivatives.
Example: A Portfolio Manager executing trades in gold futures must liquidate physical delivery positions within the time agreed with the client.
Credit Rating Requirements for PMS Investments
1. Minimum Credit Rating for Debt Investments
✔ Discretionary PMS – Cannot invest in below investment-grade securities.
✔ Non-Discretionary PMS – Cannot invest in below investment-grade listed securities.
✔ Unlisted Debt & Hybrid Securities – A maximum of 10% of AUM can be allocated to unrated securities, provided they are not issued by related parties.
✔ Investment in Unlisted Securities – Subject to the overall cap of 25% as per SEBI (Portfolio Managers) Regulations, 2020.
2. Risk Management & Rating Disclosures
✔ Any downgrade in credit rating that breaches investment-grade requirements must be reported immediately, with a clear strategy for corrective action.
✔ Portfolio Managers must disclose credit ratings of all securities in:
Quarterly client reports.
Regulatory filings with SEBI.
Example: If a Portfolio Manager holds ₹100 crore in corporate bonds, at least ₹90 crore must be investment-grade, and a maximum of ₹10 crore can be in unrated securities.
Related Party Investment Restrictions
1. Exposure Limits in Related Parties
✔ Maximum 30% of client AUM can be invested in related-party securities.
✔ Individual security limits:
15% for equity investments.
15% for debt/hybrid securities.
30% combined cap across equity, debt, and hybrid securities.
Applicability – These limits apply only to direct investments in related-party securities, not investments made via mutual funds.
Example: A PMS managing ₹500 crore for a client can allocate up to ₹75 crore in equity and ₹75 crore in debt/hybrid securities issued by its related companies.
2. Client Consent for Related Party Investments
✔ One-Time Written Consent – Portfolio Managers must obtain a one-time client approval before investing in related-party securities.
✔ Client Customization – Clients can:
Approve investments up to SEBI’s 30% cap.
Set a lower limit based on their preferences.
✔ Prominent Disclosure – The consent form must:
Highlight the terms in font size 12 or above.
Include a client signature confirming understanding.
✔ Quarterly Reporting – Any related-party investments must be disclosed in:
Quarterly client statements.
Portfolio Managers’ public disclosures.
Example: A client can choose to restrict exposure to related parties to just 10% instead of the maximum allowable 30%.
3. Passive Breach & Rebalancing Requirements
✔ What is a Passive Breach? – Occurs when a portfolio exceeds investment limits due to external factors (e.g., market fluctuations).
✔ Rebalancing Deadline – Portfolio Managers must rebalance the portfolio within 90 days of a passive breach.
✔ Client Waiver Option – A client may waive rebalancing requirements by giving prior written consent.
Example: If a stock price increase pushes related-party exposure beyond 30%, the Portfolio Manager must rebalance within 90 days, unless the client waives the requirement.
Disclaimer
For detailed Investment Restrictions for PMS, please refer to SEBI’s official website (www.sebi.gov.in). This content is for informational purposes only and should not be considered legal advice.
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