SEBI Approves Overhaul of PMS Rules, Introduces New Settlement Framework

The Securities and Exchange Board of India (SEBI) has approved a broad set of regulatory changes covering portfolio management services, settlement proceedings and foreign portfolio investor participation in commodity derivatives. 

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Among the key decisions is the introduction of a new route that will allow portfolio managers to invest client money in direct mutual fund schemes and specialised investment funds. SEBI has also changed the settlement process for regulatory cases and widened the derivatives market available to foreign portfolio investors. 

The decisions were approved by the market regulator’s board on Thursday, September 24. 

New route opens mutual funds to portfolio managers 

SEBI approved the Portfolio Managers Route for Investing in Mutual Fund Units, or PRIM, under which portfolio management services players will be able to invest client funds in direct mutual fund schemes and specialised investment funds. 

Existing portfolio managers will be allowed to offer PRIM as a separate investment approach. The minimum investment under this route has been fixed at ₹25 lakh. 

The regulator has also opened up additional investment options for portfolio managers. 

Under discretionary PMS, portfolio managers will be permitted to invest up to 10% of a client’s assets under management in investment-grade unlisted debt securities, provided the client gives consent. 

Portfolio managers will also be able to participate in initial public offerings, primary market debt issuances and exchange-traded derivatives. 

Alongside the investment-related changes, SEBI has simplified the language of the PMS regulations and removed redundant provisions. 

Independent fund managers get regulatory framework 

Another change is the introduction of independent fund managers, who will be allowed to manage client portfolios in association with a SEBI-registered portfolio manager. 

The arrangement will operate subject to investor-protection safeguards. 

The move adds another structure through which investment professionals can manage portfolios while remaining associated with a registered PMS entity. 

Settlement process gets a major revamp 

SEBI has also approved changes to its Settlement Proceedings Regulations. 

The revised framework changes settlement terms and introduces a new formula for calculating settlement amounts. Wrongful gains will be treated separately under the new system. 

One significant procedural change comes before the show-cause notice stage. 

SEBI will now issue a settlement notice to eligible entities before issuing a show-cause notice, giving them 60 days to submit a settlement application. This provision will not apply in cases where an interim order is being contemplated. 

The regulator has also widened the scope of cases that can be considered for settlement to include matters involving misrepresentation of financial statements or diversion of funds. 

For disclosure-related violations involving a settlement amount of up to ₹10 lakh, SEBI will introduce a fast-track settlement mechanism. 

Foreign investors get wider access to commodity derivatives 

SEBI’s board also approved changes allowing foreign portfolio investors to participate in a broader range of exchange-traded commodity derivatives. 

FPIs will be permitted to participate in non-agricultural index derivative contracts regardless of whether the underlying contract is cash-settled. 

They will also be allowed to participate in non-cash-settled non-agricultural commodity derivative contracts, subject to safeguards. 

In such contracts, however, foreign portfolio investors will have to exit their positions before a delivery obligation arises. 

Common advertising code approved 

SEBI also cleared a common advertisement code for certain entities regulated by the market watchdog. 

Under the framework, celebrities can be used for brand-level or entity-level promotions. 

Some mandatory prior-approval requirements will also be removed. Advertisements involving celebrity endorsements, however, will continue to require prior approval. 

The regulator separately relaxed requirements for research analysts and research entities to maintain recordings of calls and other communications with institutional investor clients. 

REITs, InvITs and accredited investors also covered 

The board meeting included several other regulatory changes. 

SEBI approved ease-of-doing-business measures for real estate investment trusts and infrastructure investment trusts, along with changes to the Vault Managers Regulations. 

The regulator also cleared the issuance of depository receipts against units of REITs and InvITs. 

Changes were approved for the accredited investor framework as well. Persons residing outside India, including foreign portfolio investors, will be treated as accredited investors, allowing them access to eligible Indian securities market products. 

SEBI also relaxed requirements for an issuer planning its first listed non-convertible debenture issuance to mandatorily list all of its outstanding unlisted NCDs. 

Taken together, the decisions change several parts of the securities-market framework, from the products portfolio managers can access to the process through which regulatory proceedings can be settled. The new rules also widen the avenues available to foreign investors while easing selected compliance requirements for regulated market participants.