Sebi board clears PMS reforms; wider FPIs’ access to commodity derivatives
The Securities and Exchange Board of India (SEBI) board approved a comprehensive overhaul of the Portfolio Managers (Portfolio Managers) regulatory framework, including a new mutual fund-focused Portfolio Management Services (PMS) category
Foreign Portfolio Investors (FPIs) were permitted to participate in physically settled, non-agricultural commodity derivative contracts, widening their access beyond the largely cash-settled instruments they could trade earlier
Portfolio managers were allowed to invest client funds in Initial Public Offerings (IPOs) and primary market debt issuances, broadening the investable universe for PMS clients
Real Estate Investment Trusts (REITs) and publicly listed Infrastructure Investment Trusts (InvITs) were permitted to issue depository receipts in permissible overseas jurisdictions
Eligibility criteria for the "accredited investor" category were widened, adding a securities-market-assets test (₹5 crore for individuals, ₹20 crore for body corporates) alongside existing income/net-worth tests
Portfolio Management Services (PMS) — SEBI (Portfolio Managers) Regulations, 2020
PMS is a SEBI-regulated investment service where a licensed portfolio manager manages a client's securities portfolio individually (unlike a mutual fund, which pools money across investors into a single scheme). It is governed by the SEBI (Portfolio Managers) Regulations, 2020, which replaced the 1993 regulations and came into effect from 16 January 2020.
Key Details
- Minimum client investment under PMS: ₹50 lakh (raised from ₹25 lakh under the earlier 1993 regime)
- Minimum net worth required of a portfolio manager entity: ₹5 crore (raised from ₹2 crore), certified by a chartered accountant, with existing managers given 36 months to comply
- PMS differs from mutual funds in that portfolios are client-specific (discretionary or non-discretionary), not pooled
- The new mutual-fund-focused PMS category approved in this meeting would let portfolio managers build client portfolios exclusively from mutual fund schemes and Specialised Investment Funds (SIFs), with lower minimum-investment (₹25 lakh) and net-worth (₹2 crore) thresholds for this specific category
The board's approval formalises a lighter-touch, lower-threshold PMS category aimed at mutual-fund-based portfolios, alongside expanding what mainstream PMS portfolios can invest in (IPOs, primary market debt).
FPI Access to Commodity Derivatives — SCRA, 1956 and the FMC-SEBI Merger
Commodity derivatives (futures/options on commodities like gold, crude, base metals) are regulated in India under the Securities Contracts (Regulation) Act, 1956 (SCRA), a jurisdiction SEBI acquired only after the erstwhile Forward Markets Commission (FMC) was merged into it. Foreign Portfolio Investors are registered and regulated under the SEBI (FPI) Regulations, 2019.
Key Details
- The Forward Markets Commission, a statutory regulator established in 1953 under the Forward Contracts (Regulation) Act, 1952, was merged into SEBI with effect from 28 September 2015, unifying regulation of equity and commodity derivatives under one regulator
- "Physically settled" derivatives require actual delivery of the underlying commodity at contract expiry, as opposed to "cash-settled" contracts, which settle only the price difference — physical settlement carries additional logistics, storage, and delivery-default risk considerations
- FPIs had earlier been allowed limited participation in cash-settled commodity derivatives; the new approval extends this to physically settled, non-agricultural contracts (e.g., bullion, base metals, energy), while agricultural commodity derivatives remain outside FPI access
- FPIs are registered via a single registration route (post the 2019 regulations, replacing the earlier three-category structure) and operate through SEBI-registered Designated Depository Participants
This decision extends the 2015 unification of commodity and securities regulation one step further by letting foreign capital participate more deeply in India's physically settled commodity markets, potentially improving price discovery and liquidity.
Accredited Investor Framework — SEBI (Alternative Investment Funds) Regulations, 2012
"Accredited investors" are a SEBI-recognised category of sophisticated investors (individuals or entities) who, having met defined wealth/income thresholds, are presumed capable of assessing investment risk and are therefore given relaxed regulatory safeguards (e.g., lower minimum investment amounts) when investing in Alternative Investment Funds (AIFs) and PMS.
Key Details
- The AIF Regulations, 2012 (in force since 21 May 2012) created three fund categories: Category I (funds in socially/economically desirable sectors, e.g., venture capital, infrastructure), Category II (private equity/debt funds with no leverage except for operations), and Category III (funds using complex/leveraged strategies, akin to hedge funds)
- Investment concentration norms: Category I and II AIFs cannot invest more than 25% of investable funds in one investee company; Category III is capped at 10%
- The accredited investor framework was introduced to allow such investors to access AIFs/PMS with relaxed minimum-investment norms, since they are assumed to need less regulatory protection
- The new criteria approved by the board (₹5 crore in securities-market assets for individuals, ₹20 crore for body corporates) add an asset-holding test alongside the pre-existing income and net-worth tests used to certify accredited investor status
Widening the accredited investor pool is intended to expand the base of investors eligible for AIFs and specialised PMS products without diluting protections for retail/non-accredited investors.
- PMS minimum client investment (general category): ₹50 lakh; proposed mutual-fund-focused PMS category: ₹25 lakh
- Portfolio manager minimum net worth: ₹5 crore (general); ₹2 crore (proposed mutual-fund-focused category)
- FMC merged into SEBI effective: 28 September 2015
- New accredited investor asset thresholds: ₹5 crore (individuals), ₹20 crore (body corporates)
- AIF investment concentration caps: 25% (Category I/II), 10% (Category III)
- FPI access extended to: physically settled, non-agricultural commodity derivative contracts