India May Let Portfolio Managers Hold Unhedged Short Positions

The Securities and Exchange Board of India published a discussion paper on Thursday proposing that portfolio management service providers be allowed to hold unhedged short positions in equity derivatives up to 50% of a client’s assets under management. The paper also proposes increasing the total permissible derivatives exposure for a portfolio manager to 1.25 times a client’s funds.

Under current practice, professional portfolio managers generally use exchange-traded derivatives for hedging cash positions or rebalancing portfolios. The draft rules would permit portfolio managers to take outright short positions in derivatives without an offsetting cash holding, subject to the 50% limit. The proposals would also cap the value of option premiums paid or received at 10% of a client’s assets.

SEBI is inviting public feedback on the proposals until 13 August. In the discussion paper, the regulator said the suggested changes reflected the “maturing investment experience and growing demand for personalised solutions” among portfolio management clients.

The paper notes that regulators have tightened oversight of retail derivatives trading in recent years after losses among individual investors in complex products. It indicates SEBI may retain stricter controls for retail participation while allowing greater flexibility for professional managers operating under portfolio management services.

If the proposals are adopted, portfolio managers would be formally permitted to take bearish positions through unhedged derivatives and to implement more explicitly directional or long-short strategies, subject to the exposure and premium limits. The consultation period will determine whether market participants and other stakeholders support the proposed scope and safeguards.