Related-party investments in PMS
Group-company investments need the client's prior written consent and stay within 15%, 25% and 30% limits.
A portfolio manager that belongs to a bigger group faces an obvious conflict: client money could be used to prop up group companies. Since SEBI's August 26, 2022 circular, it may invest a client's money in securities of its own associates or related parties only with the client's prior written consent and only within fixed limits, measured on that client's own assets under management.
This is a Chapter 12 topic in XXI-A, and in practice it comes up whenever a bank-owned or broker-owned PMS is on the table.
You save ₹100
- Full-length mock tests
- Chapter-wise question bank
- AI study plan
One payment, no subscription · Valid for 1 month
Who counts
- Related party (Reg 2(1)(pa))
- Includes the PM's directors, partners, key managerial personnel and their relatives; firms and companies they are connected with; the PM's holding, subsidiary and associate companies; related parties under accounting standards; and any promoter group entity or 10% shareholder of the PM if it is listed.
- Associate (Reg 24(3C) explanation)
- A body corporate in which a director or partner of the PM holds more than 20% of the equity or partnership interest, or one that holds more than 20% of the PM.
The limits (Master Circular 3.4.2)
As a percentage of the client's AUM, applied at the time of investment.
Equity
One associate or related party
15%
All associates and related parties together
25%
Debt and hybrid (including REIT and InvIT units, convertibles)
One associate or related party
15%
All associates and related parties together
25%
Equity, debt and hybrid combined
One associate or related party
All associates and related parties together
30%
| Security | One associate or related party | All associates and related parties together |
|---|---|---|
| Equity | 15% | 25% |
| Debt and hybrid (including REIT and InvIT units, convertibles) | 15% | 25% |
| Equity, debt and hybrid combined | 30% |
Worked example: a ₹1 crore discretionary account
- 1
One group company's shares
Up to 15%: ₹15 lakh.
- 2
All group companies' shares
Up to 25%: ₹25 lakh.
- 3
Everything related, equity plus bonds
Up to 30%: ₹30 lakh, even though 25% equity plus 25% debt would add to 50%.
- 4
The client sets a lower cap
If the client's consent form says 10% overall, ₹10 lakh is the ceiling. The client's limit overrides SEBI's when it is lower.
Free account, this exam preselected.
Consent rules (Master Circular 3.5, Annexure 3A)
- checkA one-time prior positive consent in SEBI's format, signed as part of the client agreement for new clients and by supplementary agreement for existing ones.
- checkThe form lets the client dissent entirely or set limits below SEBI's ceilings.
- checkText and figures prominently highlighted, in at least 12-point font.
- checkNo related-party investment without that consent; silence or an informal "no objection" is not consent.
- checkPassive breach (for example, a group share rises in value): rebalance within 90 calendar days, unless the client has given an informed prior waiver in the same form.
- checkThe PM keeps records of consents, breaches, steps taken and waivers.
How XXI-A tests this
The numbers are the core: 15% single, 25% across, 30% overall, and 90 days to cure a passive breach. Scenario questions say the client "never objected" and ask whether the PM may proceed; it may not without prior written consent. Another asks whether the client can choose a limit lower than SEBI's; yes. The trap is adding 25% and 25% to get 50%, or assuming the limits cover mutual funds.
FAQs
Can a PMS invest in its group company shares?expand_more
Only with the client's prior written consent and within limits: 15% of the client's AUM in one associate, 25% across associates per asset class, and 30% overall.
What happens if a PMS breaches the related-party limit because prices moved?expand_more
That is a passive breach. The PM must rebalance within 90 calendar days unless the client gave an informed prior waiver.
Do related-party limits apply to mutual fund investments in PMS?expand_more
No. They apply only to direct investment in equity, debt and hybrid securities of associates and related parties.
Can a client refuse related-party investments in PMS?expand_more
Yes. The consent form must offer a dissent option and the choice of a lower limit.