Portfolio manager may not be held accountable for securities held by its clients outside the PMS arrangement: SEBI

SEBI Informal Guidelines SEBI/HO/MRD2/MRD2DDAP/P/OVV/2022/028927/1/2022, Dated: 18.07.2022

M/s Club Millionaire Financial Services Pvt Ltd sought an interpretative letter under the SEBI (Informal Guidance) Scheme, 2003 on the issue that Whether the Portfolio Manager is accountable for the securities held by PMS (Portfolio Management Services) investors outside its PMS arrangement. SEBI clarified that a portfolio manager may not be held accountable for securities held by its clients outside the PMS arrangement.

Another query sought in an interpretive letter from SEBI is:

1. “Regulation 2(1) (q) of’ the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Whether a portfolio manager and its client, who is an acquirer are to be considered as Person Acting in Concert (“PAC”) in the situation as mentioned above.

SEBI replied by quoting the definition of PAC that a Portfolio Manager along with its clients shall be deemed to be persons acting in concert unless the contrary is established. A portfolio manager advises or directs or undertakes on behalf of the client, the management and administration of the portfolio of securities of the clients. Moreover, regulation 22(1) of the PMS Regulations requires the portfolio managers to enter into an agreement with the client that defines their relationship, inter se and sets out their mutual rights, liabilities, and obligations. In case the securities are purchased outside the said PMS arrangement, the portfolio manager and its client may not be said to be PACs. The aforementioned understanding is without prejudice to the general definition of the term PAC as mentioned under Regulation 2(1)(q)(1) of the SAST Regulations.

2. Regulation 22(3) of SEBI (Depositories & Participants) Regulation 2018: Whether, in light of the above-mentioned facts, prior approval of the board has to be obtained for acquiring above 5% of the total paid-up equity capital of CDSL, in the capacity as a Portfolio manager?”

To this query, SEBI replied provision clearly states that a person who is eligible under regulations 21(1) and 21(2) of the DP Regulations is required to obtain prior approval from SEBI for acquiring or holding more than 5% of paid-up equity share capital in a depository. Therefore, prior approval of the Board is required only when the holding exceeds 5%, according to the agreement between the portfolio manager and the client.

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