May 16, 2007
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Informal Guidance
Investment Management Department
IMD/MD/93510/2007
May 16, 2007
Ms. Molina Mehta
Director-Law & Compliance
DSP Merrill Lynch Ltd
Mafatlal Centre,
10th Floor, Nariman Point,
Mumbai – 400 021
Dear Sir,
Sub : Application for an Interpretive letter under SEBI (Portfolio Managers) Regulations, 1993
Ref : Your letter dated April 9, 2007
1.0 Please refer to you letter dated April 9, 2007 seeking ‘Interpretive Letter’ under the captioned scheme. You had sought a confirmation that investment restrictions prescribed by Regulation 16 (3) and Regulation 16 (4) of the SEBI (Portfolio Managers) Regulations, 1993 would not be applicable to portfolio managers offering non-discretionary portfolio management services, in view of the fact that the investment decisions in such cases are taken by the clients and not the portfolio managers.
2.0 It is inter-alia, informed by you that :-
(i) You are proposing to commence operations as a non-discretionary portfolio manager, i.e., you will not exercise any discretion with respect to the management of its clients’ securities or funds. All decisions in this regard will be taken solely by the client.
(ii) The Portfolio Manager Regulations, do not provide for any distinctions between discretionary portfolio managers and non-discretionary portfolio managers with regard to investment restrictions prescribed by Portfolio Manager Regulations. Such investment restrictions include those set out below :
Regulation 16 (3) and 16 (4) read as follows :
16 (3) The portfolio manager shall invest funds of his clients in money market instruments or derivatives or as specified in the contract :
Provided that leveraging of portfolio shall not be permitted in respect of investment in derivatives: etc.
16 (4) The portfolio manager shall not while dealing with clients’ funds indulge in speculative transactions that is, he shall not enter into any transactions for purchase or sale of any security which is periodically or ultimately settled otherwise than by actual delivery or transfer of security except the transactions in derivatives.
(iii) In view of the complete lack of discretion exercised by non-discretionary portfolio managers with respect to clients’ investment in securities, you are of the view that investment restrictions i.e Regulation 16 (3) and 16 (4) prescribed by the Portfolio Managers Regulations should not be made applicable in case of non-discretionary portfolio managers.
(iv) Such services would be provided within the prescribed regulatory framework.
(v) Further, it has been stated that risk disclosures would be given and client consent would be obtained.
3.0 On the basis of the information submitted by you, our views on the query raised by you are given below :-
(i) As rightly pointed out by you, the SEBI (Portfolio Managers) Regulations, 1993 do not give any exemption or non-applicability of Regulation 16 (3) and 16 (4) to portfolio managers offering non-discretionary portfolio management services alone. As a result short of an amendment to the regulations, your understanding cannot be given effect to. Such exemption cannot be given by way of an interpretive letter under the Informal Guidance Scheme.
(ii) A client of a portfolio manager would have to work within the confines of SEBI (Portfolio Managers) Regulations, 1993, as they stand at the relevant point of time.
(iii) It is therefore advised that even a non-discretionary portfolio manager would have to comply with regulations 16 (3) and 16(4) and should ensure necessary co-operation by his clients in such compliance.
4.0 This position is based on the interpretation made to the Division in your letters under reference. Different facts or conditions might require a different result. This letter does not express decision of the Board on the questions referred.
Yours faithfully,
Medha Dev
Asst. Gen. Manager
