Capital markets regulator Securities and Exchange Board of India (SEBI) has amended the rules governing portfolio managers under which they cannot invest client funds in unrated securities of their affiliates or associates. The move aims to strengthen portfolio managers’ prudential discipline, including investments in associates and related parties.

Under the notification rules, portfolio managers must ensure compliance with prudential investment restrictions imposed by regulators. These restrictions will apply at the client level when a portfolio manager invests. “Portfolio managers are not allowed to invest clients’ funds in their affiliates or their affiliates’ unrated securities,” the Sebi said in a notice on Monday.

In addition, such managers must establish an alert-based system to monitor compliance with prudential restrictions on investments and secure their client funds’ investment by the securities credit ratings prescribed by regulators.

Portfolio managers may only invest in the securities of their affiliates or affiliates in the manner prescribed by Sebi with the client’s prior consent. The requirement to obtain consent will not apply to portfolio managers as the regulator prescribes. Portfolio managers may only invest in the securities of their affiliates or affiliates in the manner prescribed by Sebi with the client’s prior consent.

In addition, Sebi said portfolio managers are required to provide clients with a disclosure document containing details of client funds invested in the securities of their affiliates or associates and details of their diversification policies. The regulator defines an “associate company” as a body corporate in which the directors or partners of a portfolio manager individually or collectively hold more than 20% of its paid-up share capital or partnership interest. The new rules will take effect on September 21.