Related party transactions in portfolio management services are subject to strict disclosure and governance requirements. This article explains the regulatory framework and compliance obligations.
Understanding Related Party
Definition
Related party in relation to a portfolio manager includes:
- A director, partner or his relative
- A key managerial personnel or his relative
- A firm in which a director, partner, manager or his relative is a partner
- A private company in which a director, partner or manager or his relative is a member or director
- A public company in which a director, partner or manager is a director or holds more than 2% of its paid-up share capital
- Any body corporate which is a holding, subsidiary or an associate company of the portfolio manager
Investment Limits
Overall Cap
Total investment in equity and debt instruments of related party cannot exceed 30% of the client's funds held with a portfolio manager.
Specific Limits
| Security | Single Related Party | Multiple Related Parties |
|---|---|---|
| Equity | 15% | 25% |
| Debt and Hybrid | 15% | 25% |
| Total (Equity + Debt + Hybrid) | - | 30% |
Disclosure Requirements
Disclosure Document
Portfolio managers must provide the client with a disclosure document containing details of:
- Investment of the client's funds in the securities of its related parties or associates
- Details of its diversification policy
Periodic Reports
Portfolio managers must disclose in periodic reports to clients:
- Details of investment of client's funds in securities of associates/related parties
- Details of instances of passive breach of investment limits
- Steps taken to rectify the same
Dynamic Section
Portfolio managers need to disclose in the dynamic section:
- Details of investments in the securities of related parties
Consent Requirements
Prior Consent
Portfolio manager may make investments in the securities of its related parties or its associates only after obtaining the prior consent of the client.
Consent Form
The consent form must include:
- Option to indicate consent or dissent
- Option to specify a limit below the ceiling
- Risks and conflict of interest disclosure
- Waiver from rebalancing on passive breach
Client Understanding
For new clients, the consent must be obtained at the time of entering into agreement.
Passive Breach
Definition
Passive breach occurs when the specified investment limits are breached due to circumstances not arising out of omission and/or commission of portfolio manager (e.g., market movements, corporate actions).
Rebalancing
In the event of passive breach, rebalancing of the portfolio shall be completed within a period of 90 days from the date of such breach.
Waiver
The client may give an informed, prior positive consent to the portfolio manager for waiver from the rebalancing requirement.
Governance Requirements
Board Oversight
The Board of the portfolio manager must:
- Review related party transactions
- Ensure compliance with limits
- Monitor disclosure requirements
Record Keeping
Portfolio managers must maintain records of:
- Prior positive consent or dissent
- Instances of passive breach
- Steps taken to rectify
- Waiver obtained from client
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on related party transaction compliance for portfolio managers. Our securities law experts help clients implement compliant processes, draft consent forms, and ensure regulatory compliance. Contact us for guidance on related party transactions and other regulatory matters.