Sebi issues consultation paper on ‘portfolio manager’ norms

The move assumes significance as the government has already announced taxation incentives for offshore fund managers who are willing to relocate to India.

The regulator has issued a consultation paper for ‘amendments to the Sebi (Portfolio Managers) Regulations, 1993’, which aims at making it easier for the overseas funds to relocate to Indian shores.

The Securities and Exchange Board of India (Sebi) has sought public comments till July 3 from all the stakeholders. The final norms will be put in place after taking into consideration the comments.

 The proposed amendments include a separate section on ‘Eligible Fund Managers’, which specify conditions that will apply to their activities as portfolio managers. 

The new rules have also specified the procedure to be followed by a Sebi-registered portfolio manager to function as an Eligible Fund Manager.

Besides, Sebi has proposed to lay out the procedure for registration of an existing foreign based fund manager desirous of relocating to India or a fresh applicant to function as an Eligible Fund Manager.

 While listing out the obligations and responsibilities of Eligible Fund Managers, Sebi has proposed non-applicability of certain provisions of portfolio managers regulations on Eligible Fund Managers.

These provisions include ‘High Water Mark Principle’ regarding calculation of fees, disclosure of fees, obligation to act in a fiduciary capacity and audit of overseas fund. Besides, the rules regarding mandatory agreement between the portfolio manager and overseas fund, reporting about overseas fund and minimum investment requirements (Rs 25 lakh) would also not be applicable for such overseas funds.

After the announcement in the Union Budget, a new section was added to the Income Tax Act to provide that the fund management activity carried out through an Eligible Fund Manager (EFM) located in India and acting on behalf of an Eligible Investment Fund (EIF) would not constitute business connection in India of such a fund.

Following the issuance of notification by the tax department in this regard, Sebi held meetings with various stakeholders to discuss the registration framework for EFMs, during which several impediments were pointed out in the existing regulations for Investment Advisers and Portfolio Managers. Subsequently, Sebi’s board last week decided to initiate a consultation process for changes to its norms for Portfolio Managers while putting in place a framework for allowing EFMs to act as Portfolio Managers to their EIFs. 

Among the proposed measures, an existing Sebi-registered Portfolio Manager will also be allowed to act as EFM with prior intimation from Sebi and subject to certain conditions. Sebi has proposed procedure for registration of an existing foreign-based fund manager desirous of relocating to India, or as a fresh applicant. 

Such applicants will be granted registration as Portfolio Managers to act as an EFM, provided they meet existing eligibility norms of being a body corporate, having net worth of Rs 2 crore, appointment of a Principal Officer and minimum two employees with requisite credentials.

The EFMs would be required to segregate the funds and securities of the EIFs from that of other clients, provide information to Sebi on a half-yearly basis, ensure compliance to the Prevention of Money Laundering Act and other regulations, as per the paper. However, EFMs would be exempted from several provisions of the PMS Regulations with respect to the EIF, and would have to comply with the applicable regulatory and disclosure requirements of the respective jurisdiction.

EIF is a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit. Besides, the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed 5 per cent of the corpus of the fund; it has a minimum of 25 members who are, directly or indirectly, not connected persons. 

“The aggregate participation interest, directly or indirectly, of 10 or less members along with their connected persons in the fund, shall be less than 50 per cent,” as per the consultation paper.