SEBI Proposes Major Reforms for Portfolio Managers to Enhance Investment Opportunities

The Securities and Exchange Board of India (SEBI) has proposed significant reforms to modernize the regulatory framework for portfolio managers. These changes aim to facilitate overseas investments and broaden the use of exchange-traded derivatives. The draft regulations, which are open for public consultation, seek to enhance investment opportunities for sophisticated investors while ensuring compliance with existing laws. Key proposals include allowing investments in foreign securities and expanding the scope for derivatives trading. SEBI's initiative is designed to provide high-net-worth individuals with professionally managed access to global markets, creating a more flexible and diverse investment landscape. Public feedback is invited before finalizing the updated rules.

By Narendra Chaudhary Jul 24, 2026, 19:35 IST

Introduction to SEBI's New Proposal

The Securities and Exchange Board of India (SEBI) has introduced an extensive proposal aimed at modernizing the regulatory framework for portfolio managers. This initiative is set to facilitate international investments and expand the utilization of exchange-traded derivatives. The proposed modifications are part of the draft SEBI (Portfolio Managers) Regulations, 2026, which are currently open for public feedback. The regulator's objective is to enhance investment avenues for sophisticated investors while updating existing regulations to align with evolving market dynamics and investment methodologies.

Key Proposals for Overseas Investments

One of the most notable changes would permit portfolio managers to invest client funds in specific foreign securities, a practice that is not allowed under current regulations. The consultation document specifies that eligible foreign investments may encompass listed foreign equity shares, foreign debt instruments, and overseas mutual funds or unit trusts regulated by foreign authorities that invest in listed equities, debt securities, and overseas listed Real Estate Investment Trusts (REITs).

SEBI emphasized, "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, and overseas funds." This change aims to provide investors with access to foreign securities through a regulated investment professional framework.

The proposal is designed to offer high-net-worth individuals and other sophisticated investors professionally managed access to global markets. It also aims to establish greater regulatory uniformity with mutual funds, Alternative Investment Funds (AIFs), and IFSC-based portfolio managers, which already have the authority to make overseas investments.

Furthermore, all such investments will remain subject to the provisions of the Foreign Exchange Management Act (FEMA), 1999. Portfolio managers will be accountable for ensuring compliance with FEMA limits and reporting requirements. Additionally, explicit consent from clients will be required before any overseas investment is executed.

Enhanced Flexibility for Derivatives Trading

SEBI has also suggested broadening the scope for portfolio managers to engage in exchange-traded derivatives, reflecting the growing demand from investors for more tailored investment strategies. Under the proposed framework, portfolio managers could maintain total exposure of up to 1.25 times a client's assets under management (AUM). Within this limit, unhedged short exposure through equity exchange-traded derivatives would be restricted to 50% of the client's AUM, alongside derivative positions utilized for hedging and portfolio rebalancing.

SEBI stated, "Considering the maturing investment experience and increasing demand for more diversified and personalized solutions, it is proposed to permit portfolio managers to invest clients' funds in exchange-traded derivatives." This proposal aims to provide portfolio managers with greater operational flexibility while supporting more sophisticated investment strategies for eligible clients.

Additional Reforms to Broaden Investment Options

In addition to overseas investments and derivatives, SEBI has proposed several reforms intended to expand the investment landscape and simplify compliance processes. Among these proposals is the allowance for portfolio managers to invest in "to be listed" securities. The regulator has also recommended that discretionary portfolio managers be permitted to allocate up to 10% of a client's AUM to investment-grade unlisted debt securities.

Another significant recommendation is the establishment of a dedicated Mutual Fund-only Portfolio Management Services (MF-PMS) framework, which is expected to lower the entry barriers for investors seeking professionally managed mutual fund portfolios. The consultation paper also suggests simplifying regulatory language, consolidating various compliance provisions, and implementing measures to make the regulatory framework more user-friendly. SEBI has invited public input on the draft regulations before finalizing the updated rules.