SEBI has released a consultation paper to overhaul Portfolio Management Services (PMS), allowing them to invest in foreign securities for the first time. The regulator also plans to introduce a new 'MF-only' PMS category with a lower entry threshold of ₹25 lakh, down from the current ₹50 lakh. These changes aim to provide affluent investors with more diversification options and lower compliance hurdles for managers.
Detailed Coverage
The Securities and Exchange Board of India (SEBI) has released a consultation paper outlining major structural changes to the Portfolio Management Services (PMS) framework. These proposals are designed to increase the flexibility of portfolio managers while expanding the range of investment products available to high-net-worth individuals.
Global Access and Pre-IPO Opportunities
A major highlight of the proposal is the plan to allow portfolio managers to invest client capital in foreign securities. This includes listed overseas equities, debt instruments, and foreign mutual funds, as well as foreign-listed REITs. These investments will remain subject to the existing Foreign Exchange Management Act (FEMA) and Liberalised Remittance Scheme (LRS) regulations, and managers will be required to obtain specific client approval before any offshore allocation. In addition to global diversification, SEBI is looking to permit investments in unlisted securities. This move could grant clients access to pre-IPO opportunities and investment-grade unlisted debt, with a proposed limit of 10 percent of a client's total assets for such unlisted debt instruments.
New Category for Mutual Fund Portfolios
To widen the reach of professional money management, SEBI has proposed a new 'MF-only PMS' category. This segment will be dedicated exclusively to investing in the direct plans of mutual funds, including Exchange Traded Funds (ETFs) and Specialized Investment Funds. By focusing on this structure, the regulator intends to lower the barrier to entry for investors. The minimum investment for this category is proposed at ₹25 lakh, which is half of the current ₹50 lakh threshold for general PMS services. Correspondingly, the net worth requirement for entities applying to manage this specific category would also be reduced to ₹2 crore, making it easier for smaller or specialized firms to enter the space.
Changes to Derivative Usage and Operations
The regulator has also proposed a clearer framework for the use of derivatives. Under the new rules, the total exposure to exchange-traded derivatives would be capped at 1.25 times the client’s Assets Under Management (AUM). There are specific caps for different types of derivative strategies: unhedged short exposure in equity derivatives will be limited to 50 percent of AUM, while option premium exposure will be capped at 10 percent. These positions would also require clear consent from the client. Alongside these investment changes, SEBI is seeking to simplify compliance and operational processes, which have historically been a point of friction for PMS providers trying to balance regulatory requirements with portfolio performance. These proposals are currently in the consultation phase, and investors should track the final notification from SEBI for the official implementation timeline and any modifications to these draft limits.