The Securities and Exchange Board of India (SEBI) has unveiled a wide-ranging proposal to modernise the regulatory framework governing portfolio managers, opening the door for overseas investments and broader use of exchange-traded derivatives. The proposed changes form part of the draft SEBI (Portfolio Managers) Regulations, 2026, which have been released for public consultation.
The regulator’s review aims to widen investment opportunities for sophisticated investors while updating the existing rules to better reflect changing market conditions and investment practices.
One of the most significant proposals would allow to deploy client funds in select foreign securities, a move that is currently not permitted under the existing regulations.
As outlined in the consultation paper, eligible overseas investments could include listed foreign equity shares, listed foreign debt instruments, and overseas mutual funds or unit trusts regulated by foreign authorities that invest in listed equities, listed debt securities, and overseas listed Real Estate Investment Trusts (REITs).
SEBI stated, “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. Overseas Funds.”
The regulator also added that this would enable investors to get access to foreign securities through a regulated investment professional landscape.
According to SEBI, the proposal is intended to provide high-net-worth individuals and other sophisticated investors with professionally managed access to global markets. It would also create greater regulatory consistency with mutual funds, Alternative Investment Funds (AIFs), and IFSC-based portfolio managers, which already have permission to make overseas investments.
The consultation paper further clarifies that all such investments would remain subject to the provisions of the Foreign Exchange Management Act (FEMA), 1999. Portfolio managers would be responsible for ensuring compliance with FEMA limits and reporting obligations. In addition, explicit positive consent from clients would be mandatory before any overseas investment is made.
Greater Flexibility Proposed For Derivatives Trading
SEBI has also proposed expanding the scope for portfolio managers to use exchange-traded derivatives, reflecting increasing investor demand for more customised investment strategies.
Under the draft framework, portfolio managers could maintain total exposure of up to 1.25 times a client’s assets under management (AUM). Within this ceiling, unhedged short exposure through equity exchange-traded derivatives would be capped at 50 per cent of the client’s AUM, alongside derivative positions used for hedging and portfolio rebalancing.
It stated, “Considering the maturing investment experience and growing demand for more diversified and personalised solutions, it is proposed to permit portfolio managers to invest clients’ funds in exchange-traded derivatives”.
The proposal is aimed at offering portfolio managers greater operational flexibility while supporting more sophisticated investment approaches for eligible clients.
Draft Rules Also Expand Investment Options And Simplify Compliance
Beyond overseas investments and derivatives, SEBI has recommended several additional reforms designed to broaden the investment universe and streamline compliance requirements.
Among the proposals is permission for portfolio managers to invest in “to be listed” securities. The regulator has also suggested allowing discretionary portfolio managers to allocate up to 10 per cent of a client’s AUM to investment-grade unlisted debt securities.
Another notable recommendation is the introduction of a dedicated Mutual Fund-only Portfolio Management Services (MF-PMS) framework, which is expected to lower the entry threshold for investors seeking professionally managed mutual fund portfolios.
The consultation paper also proposes simplifying regulatory language, consolidating various compliance provisions, and introducing measures aimed at making the regulatory framework easier to navigate. SEBI has invited public feedback on the draft regulations before finalising the updated rules.