SEBI Proposes Allowing Portfolio Managers to Invest in Foreign Stocks

SEBI proposes allowing portfolio managers to invest in foreign securities and use exchange-traded derivatives, including unhedged short positions. The move aims to expand investment avenues for clients and align regulations with market dynamics.

The Securities and Exchange Board of India (SEBI) has proposed allowing portfolio managers to invest clients' funds in foreign securities and take unhedged short positions through equity exchange-traded derivatives as part of a comprehensive review of the SEBI (Portfolio Managers) Regulations, 2020 aimed at expanding investment avenues and aligning the regulatory framework with evolving market dynamics. The proposals have been put out for public consultation through a consultation paper on the draft SEBI (Portfolio Managers) Regulations, 2026.

Expanding Investment in Foreign Securities

According to the consultation paper, portfolio managers are currently not permitted to invest client funds in foreign securities. SEBI has proposed permitting investments in listed foreign equity shares, listed foreign debt securities and overseas mutual funds or unit trusts registered with overseas regulators that invest in listed equity, listed debt securities and overseas listed Real Estate Investment Trusts (REITs).

SEBI stated, "Currently, portfolio managers are not permitted to invest client funds in foreign securities....... it is proposed to allow portfolio managers to invest client funds in the following overseas securities. Listed equity shares. Listed debt securities. Overseas Funds." It also added that this would enable investors to get access to foreign securities through a regulated investment professional landscape

The market regulator said the proposal would provide sophisticated investors and high-net-worth individuals access to overseas investment opportunities through regulated portfolio managers while bringing regulatory parity with mutual funds, Alternative Investment Funds (AIFs) and IFSC-based portfolio managers that are already permitted to undertake overseas investments.

The consultation paper stated that investments in foreign securities would be governed under the Foreign Exchange Management Act (FEMA), 1999. Portfolio managers would be required to ensure compliance with applicable FEMA limits and reporting requirements. They would also have to obtain explicit positive consent from clients before making investments in foreign securities.

Greater Flexibility with Derivatives

SEBI has also proposed giving portfolio managers greater flexibility in the use of exchange-traded derivatives. Under the proposal, portfolio managers would be allowed to undertake a total exposure of up to 1.25 times a client's assets under management (AUM).

It stated, "Considering the maturing investment experience and growing demand for more diversified and personalised solutions, it is proposed to permit portfolio managers to invest clients' funds in exchange-traded derivatives". Within this overall limit, they would be permitted to take unhedged short exposure through equity exchange-traded derivatives of up to 50 per cent of the client's AUM, in addition to derivative exposure used for hedging and portfolio rebalancing.

Other Key Proposed Changes

Apart from these proposals, the consultation paper has suggested permitting investments in "to be listed" securities to broaden the investment universe for portfolio managers.

SEBI has also proposed allowing discretionary portfolio managers to invest up to 10 per cent of a client's AUM in investment-grade unlisted debt securities, while introducing a dedicated Mutual Fund-only Portfolio Management Services (MF-PMS) framework with lower entry barriers for investors.

The consultation paper also includes several ease-of-compliance measures, consolidation of regulatory provisions and simplification of language, while seeking public comments on the proposed changes before finalising the new regulations. (ANI)

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