In a recent informal guidance, the Securities and Exchange Board of India (“SEBI”) stated that the present legal framework governing portfolio managers does not envisage investment in/ advise on offshore shares and securities which are neither listed or intend to get listed in the recognized stock exchanges.

On October 29, 2021 SEBI issued an informal guidance in connection with SEBI (Portfolio Managers) Regulations, 2020 (“PM Regulations”) in response to a request from ASK Wealth Advisors Private Limited (“ASK”). ASK is a portfolio manager registered with SEBI.

ASK had sought an informal guidance from SEBI on the interpretation of certain provisions of the PM Regulations. ASK’s interpretation was as follows:

“Subject to the compliance with the restriction imposed under Regulation 24(4) of PM Regulations and Master- Direction – Liberalised Remittance Scheme (“LRS Circular”), a portfolio manager may invest funds of resident individual clients, who are rendered non-discretionary and advisory services by the portfolio manager, in securities of companies outside India, and units of offshore mutual funds or offshore venture capital funds. Accordingly, portfolio managers may invest funds of their individual clients who avail non-discretionary portfolio manager services in offshore shares and securities (as per the terms of the LRS Circular) up to 25% of their assets under management since such offshore shares and securities are not listed or traded on an Indian stock exchange. This is on the basis that the shares of offshore companies, or units of offshore mutual funds or venture capital funds which are not listed in Indian stock exchanges cannot be classified as ‘securities listed or traded on recognized stock exchange’, and hence would be classified as ‘unlisted securities’.”

SEBI, in its response, considered the definition of ‘Portfolio Manager’ under the PM Regulations and the definition of the term ‘securities’ under the Securities Contract Regulation Act, 1956 (“SCRA”) and opined that the SCRA is applicable to the territory of India, and therefore, the term ‘securities’ as defined under SCRA may be construed to be applicable to securities issued, listed or proposed to be listed in India. Further, SEBI made a reference to section 24 of the Companies Act, 2013 under which SEBI has the power to regulate on matters relating to issue and transfer of securities and non-payment of dividend by listed companies or companies which intend to get their securities listed on any recognized stock exchange in India. Therefore, SEBI may regulate the issue and transfer of only securities of those companies incorporated in India, which are listed or intend to get listed in the recognized stock exchange. Thus, the present legal framework governing portfolio managers does not envisage investment in/ advise on offshore shares and securities which are neither listed or intend to get listed in the recognized stock exchanges.

Please find a copy of the Informal Guidance here.

This update has been contributed by Adity Chaudhury (Partner) and Jinansh Shah (Associate).

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