New Delhi, July 20 -- Portfolio management service providers can't treat alternative investment fund units transferred from their associate fund management companies as exempt from the prudential limits fixed under regulatory norms, the Securities and Exchange Board of India has said.

AIFs-which include private equity, venture capital, private credit and public market-focused funds-are not similar to mutual funds and both investment vehicles are governed under separate regulations, the regulator said in an informal guidance note in response to a query raised by Sundaram Alternate Assets.

Sundaram Alts is registered with SEBI as a portfolio manager offering portfolio management services (PMS) and is also an investment manager to two AIFs. Under the informal guidance route, it had queried SEBI whether prudential limits set on an associated entity's investments would be applicable to associated AIF units, too.

What the law says

According to Regulation 24(3A) of the SEBI (Portfolio Managers) Regulations, 2020, and Master Circular for Portfolio Managers, portfolio managers must ensure that a client's investment in an entity related to or associated with the PMS is limited to 30% of the client's total portfolio.

This limit, however, does not apply to investments in an associated mutual fund.

Sundaram Alts asked if AIF units held by the client in multiple schemes of its Category II AIFs were transferred to a separate account of the client managed by its discretionary PMS or under the Strategy for Large Value Accredited Investors (LVAI), would these units be exempt from the prudential limits.

That is, if units of a Sundaram AIF were transferred to the client's account managed by Sundaram's PMS, would they trigger the prudential limits?

Sundaram Alts said that this would be done with the client's written consent and pointed out that AIFs are also pooled vehicles just as mutual funds are.

However, SEBI said that the limits would apply to AIF units, even if the units were already held by the client and were just being transferred to Sundaram's PMS.

SEBI's stand

Anand Kankani, a practising company secretary in securities law, explained that SEBI noted the exemption is expressly confined to investments in mutual funds. "An alternative investment fund is a privately pooled investment vehicle regulated under the SEBI (AIF) Regulations, 2012. Further, the statutory definition of an AIF specifically excludes funds regulated under the SEBI (Mutual Funds) Regulations, 1996," Kankani said.

SEBI clarified that AIF units cannot be equated with mutual fund units merely because both are pooled investment products, he added.

Kankani wrote that the more important aspect of the guidance note is that the prudential limits apply even where the portfolio manager does not undertake a fresh purchase or subscription.

"SEBI has clarified that the limits would also apply where AIF units already held by the client are transferred into a separate account maintained with the portfolio manager," he added.

Published by HT Digital Content Services with permission from VC Circle.