The Hindu Business Line : `Portfolio managers can deal in derivatives thru stock exchanges'

PROVIDING clarity to the recent amendments to the regulations on portfolio managers, the Securities and Exchange Board of India (SEBI) said that the portfolio managers were permitted to invest in derivatives, including transactions for the purpose of hedging and portfolio rebalancing, however, through a recognised stock exchange.

The clarification comes in the wake of numerous queries from the portfolio managers pertaining to the removal of lock-in period of one year and also on permitting them to invest in derivatives.

In a communiqué to portfolio managers, the market regulator said, in terms of amendment to Regulation 16(1)(b), the lock-in period of one year has been removed. SEBI asked the portfolio managers to note that the amended regulations were applicable to new investors, those entering into agreement after passing of the amendment.

The amended regulations were also applicable to the existing investors, who had entered into portfolio management agreement prior to the said amendment. However, both of them would be eligible for the exemption from lock-in period provided the agreement was suitably modified to provide for the same.

According to SEBI, the portfolio managers were permitted to invest in derivatives, including transactions for the purpose of hedging and portfolio rebalancing, through a recognised stock exchange. The regulator informed the portfolio managers that they could invest in derivatives on the terms specified in the portfolio management agreement. The agreement should contain complete details pertaining to the manner and terms of usage of derivative product, including quantum of exposure to derivatives, in absolute terms and as a percentage of investments in other securities in the portfolio.

The agreement should also contain details such as the type of derivative instruments, purpose of using derivatives, type of derivative position and the exposure thereof, terms of valuing and liquidating derivative contracts in the event of liquidation of portfolio management scheme, and prior permission from investors in the event of any changes in the manner or terms of usage of derivative contracts.

Further, SEBI said the total exposure of the portfolio client in derivatives should not exceed his portfolio funds placed with the portfolio manager and the portfolio manager should basically invest and not borrow on behalf of his clients.

The regulator also made it clear that the investment in derivatives should be on those terms that were mutually agreed between the portfolio manager and the client through the portfolio management agreement.

"In the event of any violation of the terms of the agreement, the portfolio manager shall be responsible. The portfolio managers are required to provide necessary disclosures in terms of Regulation 14 (2) and Schedule-V," the SEBI clarification said.

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`Portfolio managers can deal in derivatives thru stock exchanges'