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Securities and Exchange Board of India

SECURITIES AND EXCHANGE BOARD OF INDIA
PRIMARY MARKET DEPARTMENT
MITTAL COURT, ‘A’ WING, GROUND FLOOR
NARIMAN POINT, MUMBAI – 400 021.
TEL NO. : 22850451- 56/ 22880962-70

FAX NO. :2204 5633

SEBI/RPM CIRCULAR NO.3 (2002-2003)
February 5, 2003

To all registered Portfolio Managers

As you are aware, vide the SEBI (Portfolio Managers) Amendment Regulations, 2002,  certain amendments have been carried out in SEBI (Portfolio Managers) Regulations 1993.

The Board has been receiving queries from portfolio managers on the following main issues :

1. Amendment to Reg.16(1)(b) – Removal of lock in period of one year  Whether the provision is applicable only to new investors or even existing  investors.

2. Amendment to Reg. 16(3) permitting investment in Derivatives :

Interpretation of the terms “…Provided that leveraging of portfolio shall not be  permitted in respect of investment in derivatives…”.

It is therefore clarified as under :

1. In terms of amendment to Reg 16(1)(b), the lock in period of one year has been removed.  In this regard, it may be noted that the amended regulations are applicable to

a. New Investors (Investors entering into agreement after passing of the amendment )and

b. Existing Investors(Investors who had entered into portfolio management agreement prior to above amendment) provided that the Agreement is suitably modified to provide for the same.

2. The Portfolio Managers are permitted to invest in  derivatives, including transactions for the purpose of hedging and portfolio rebalancing, through a recognised stock exchange. For clarification on hedging and portfolio rebalancing, the portfolio managers are requested to refer to Circular No. MFD/CIR/21/ 25467/2002 dated 31.12.2002 issued by Mutual Funds Dept., SEBI.  The same is available at SEBI website.

The portfolio managers can 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), 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, prior permission from investors in the event of any changes in the manner or terms of usage of derivative contracts etc.

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..

It may be clearly noted that investment in derivatives shall be on terms mutually agreed between the portfolio manager and the client through the portfolio management agreement.  In the event of the any violation of the terms of the agreement, the portfolio manager shall be responsible.

The portfolio managers are required to provide necessary disclosures in Disclosure Document in terms of Regulation 14(2) and Schedule V.

Yours faithfully,
NEELAM BHARDWAJ
Division Chief

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