Regulation 11(aa) of the SEBI (Portfolio Managers) Regulations, 2020 requires portfolio managers to obtain prior approval of SEBI in case of change in control. This article provides a comprehensive guide to the prior approval process.
The Regulatory Requirement
Legal Basis
Regulation 11(aa) of the PM Regulations provides that the portfolio manager shall obtain prior approval of the Board in case of change in control. This requirement was introduced through the SEBI (Portfolio Managers) (Second Amendment) Regulations, 2021.
Definition of Change in Control
For a body corporate whose shares are listed on any recognized stock exchange, change in control shall be construed with reference to the definition of control in terms of regulations framed under clause (h) of sub-section (2) of section 11 of the SEBI Act.
For a body corporate whose shares are not listed on any recognized stock exchange, change in control shall be construed with reference to the definition of control as provided in sub-section (27) of Section 2 of the Companies Act, 2013.
Prior Approval Process
Step 1: Online Application
An online application shall be made by the Portfolio Manager to SEBI for prior approval through the SEBI Intermediary Portal (https://siportal.sebi.gov.in).
Step 2: SEBI Review
SEBI reviews the application for compliance with regulatory requirements. Upon being satisfied, SEBI grants prior approval.
Step 3: Validity of Approval
The prior approval granted by SEBI shall be valid for a period of six months from the date of such approval.
Step 4: Fresh Registration Application
Applications for fresh registration pursuant to change in control shall be made to SEBI within six months from the date of prior approval.
Step 5: Client Communication and Exit Option
Pursuant to grant of prior approval by SEBI, in order to enable existing investors/clients to take well informed decision regarding their continuance or otherwise with the changed management, the portfolio manager shall inform its existing investors/clients about the proposed change prior to effecting the same and give an option to exit without any exit load, within a period of not less than 30 calendar days, from the date of such communication.
NCLT Approval for Schemes of Arrangement
In matters which involve scheme(s) of arrangement which needs sanction of the National Company Law Tribunal (NCLT) in terms of the provisions of the Companies Act, 2013, the Portfolio Manager shall ensure the following:
Step 1: The application seeking approval for the proposed change in control under PM Regulations shall be filed with SEBI prior to filing the application with NCLT.
Step 2: Upon being satisfied with compliance of the applicable regulatory requirements, in-principle approval shall be granted by SEBI.
Step 3: The validity of such in-principle approval shall be three months from the date of such approval, within which the relevant application shall be made to NCLT.
Step 4: Within 15 calendar days from the date of order of NCLT, Portfolio Manager shall submit an online application along with the following documents to SEBI for final approval:
- Copy of the NCLT Order approving the scheme
- Copy of the approved scheme
- Statement explaining modifications, if any, in the approved scheme vis-à-vis the draft scheme and the reasons for the same
- Details of compliance with the conditions/observations mentioned in the in-principle approval provided by SEBI
Co-Investment Portfolio Manager Exception
For clients under co-investment portfolio management services, the Portfolio Manager shall ensure compliance with the second proviso of Regulation 22(2) of PMS Regulations regarding exit.
Consequences of Non-Compliance
Regulatory Action
Failure to obtain prior approval for change in control can result in:
- Enforcement action by SEBI
- Monetary penalties
- Suspension or cancellation of registration
Business Impact
Non-compliance can lead to:
- Invalidation of the change in control
- Disruption of business operations
- Loss of investor confidence
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on change in control for portfolio managers. Our securities law experts help clients navigate the prior approval process, prepare applications, and ensure compliance with regulatory requirements. Contact us for guidance on change in control and other regulatory matters.