Sebi approves PMS-mutual fund route and overhauls settlement rules

Widens FPI access to non-agri commodity derivatives

The Securities and Exchange Board of India (Sebi) on Thursday approved a wide-ranging set of reforms, including an overhaul of portfolio manager regulations, changes to settlement proceedings, expanded access for foreign portfolio investors (FPIs) to exchange-traded commodity derivatives, and a common advertisement code for regulated entities.

 

The board cleared the introduction of a Portfolio Managers Route for Investing in Mutual Fund Units (PRIM), which will allow portfolio management services (PMS) players to invest client funds in direct mutual fund schemes and specialised investment funds (SIFs). Existing PMS players will be able to offer PRIM as a separate investment approach, with a minimum ticket size of ₹25 lakh.

 

 

Sebi also approved a new category of "independent fund managers" (IFMs), who will manage client portfolios in association with a registered portfolio manager, subject to investor protection safeguards. Additionally, PMS players will be permitted to invest up to 10 per cent of client assets under management in investment-grade unlisted debt securities under discretionary PMS, with client consent, and will be allowed to invest in IPOs, primary market debt issuances, and exchange-traded derivatives. The regulator said the language of the PMS regulations had also been simplified, with redundant clauses removed.

 

On settlement proceedings, Sebi approved changes to settlement terms, a new formula for computing settlement amounts, and separate treatment for wrongful gains. The regulator will now issue a settlement notice to entities before a show-cause notice, giving them 60 days to apply for settlement — except in cases where an interim order is expected. Settlement has also been extended to cases involving misrepresentation of financial statements or diversion of funds, while a fast-track settlement mechanism has been introduced for disclosure-related violations where the settlement amount is up to ₹10 lakh.

 

For FPIs, the board approved participation in non-agricultural index derivatives contracts — irrespective of whether the underlying is cash-settled — and in non-cash-settled non-agricultural commodity derivatives contracts, subject to safeguards. FPIs will be required to exit such commodity derivatives positions before the delivery obligation arises.

 

Sebi chairman Tuhin Kanta Pandey said the regulator had received more than 3,500 comments on its ongoing consultation on reforms to the Closing Auction Session (CAS), and that the Reserve Bank of India was examining some of the issues Sebi had flagged around easing FPI operations, including faster onboarding.

 

On the margin trading facility (MTF), Pandey said the segment had grown over the past two years but remained well diversified, with the top 25 scrips accounting for about 20 per cent of the overall MTF book. He said the regulator remained watchful of the risk management framework governing the segment.

 

Responding to brokers' concerns over the merchant discount rate (MDR) on UPI transactions in capital markets, Pandey said the issues facing capital market participants differed from those of typical merchants. "We have heard them (issues of the brokers), and are looking at how we can represent them. They (brokers) have also made representation to the government," he said. Brokers have argued that since they periodically refund client funds, UPI transactions do not generate revenue for them, unlike conventional merchant transactions.

 

On co-location access in the commodities segment, Pandey said access needed to be fair to all participants, with no scope for inequitable access to trading platforms — particularly given the presence of farmers in the segment. He added that the regulator was pushing exchanges to strengthen systems and improve governance.

 

Following the board meeting, Sebi also relaxed the requirement for research analysts and research entities to maintain call recordings of communications with institutional clients.

 

The regulator approved a common advertisement code for certain regulated entities, permitting the use of celebrities for brand- or entity-level promotion, while doing away with certain mandatory prior approvals — except where celebrity endorsements are involved.

 

Sebi also cleared the issuance of depository receipts on units of REITs and InvITs, a move aimed at attracting foreign capital into these instruments. Under a reformed accredited investor framework, persons resident outside India — including FPIs — will be deemed accredited investors, enabling access to eligible Indian securities market products and facilitating foreign capital inflows.

 

Other approvals included changes to Vault Manager regulations, ease-of-doing-business measures for real estate investment trusts and infrastructure investment trusts, and relaxation of the requirement for issuers planning their first listed non-convertible debenture (NCD) issuance to mandatorily list all outstanding unlisted NCDs.