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Portfolio managers cannot invest in unrated securities of related parties

24 Aug 2022 , 07:56 AM

Portfolio managers will not be permitted to invest client money in unrated securities of their relatives or connections under new rules adopted by capital markets regulator Sebi.

The action aims to improve prudential standards for portfolio managers’ investments, including those in associates and related parties.

The portfolio manager will be required to guarantee compliance with the prudential restrictions on investments as stipulated by the regulator under the published regulations. When the portfolio managers make investments, the limits will be effective at the customer level.

The Securities and Exchange Board of India (Sebi) said on Monday that portfolio managers “will not be allowed to invest customers’ funds in unrated securities of their linked parties or their associates.”

Such a manager will also be required to implement an alert-based system to monitor adherence to the prudential limitations on investments and will be required to ensure that client funds are invested in accordance with the regulator-specified credit rating of securities.

Only after receiving the client’s prior authorization in accordance with Sebi’s guidelines can the portfolio manager invest in the securities of its affiliated parties or associates. These portfolio managers will not be subject to the regulator’s requirement to acquire consent.

A portfolio manager must also give the client a disclosure document that includes information about the client’s funds being invested by the portfolio manager in the securities of its related parties or associates as well as information about the portfolio manager’s diversification strategy, according to Sebi.

The regulator defined “associate” as a legal entity in which a director or partner of the portfolio manager holds more than 20% of its paid-up equity share capital or partnership interest, either individually or collectively.

The new regulations will take effect on September 21.

 

Related Tags

  • mutual funds
  • Regulation
  • SEBI
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