India Considers Letting Portfolio Managers Take Bigger Shorts

The Securities and Exchange Board of India (SEBI) has proposed new rules that would let professional portfolio managers hold unhedged short positions in equity derivatives up to 50% of a client’s assets and raise total derivatives exposure to 1.25 times client funds. SEBI published a discussion paper and is seeking feedback until 13 August.

Currently, portfolio management service providers generally use exchange-traded derivatives for hedging cash positions and rebalancing portfolios. The draft rules would permit naked short positions in equity derivatives up to half of assets under management and increase the overall derivatives exposure limit to 1.25 times client funds.

The regulator would also cap options trading by limiting the premium paid or received to 10% of a client’s assets.

The discussion paper states the proposals reflect the “maturing investment experience and growing demand for personalised solutions” among portfolio management clients.

The paper indicates a distinction between retail investors and professional portfolio managers, offering broader flexibility for the latter while keeping tighter controls on retail participation following losses among individual investors in recent years.

The consultation asks for comments on operational safeguards, client suitability standards and risk-management requirements that would accompany the new permissions. Market participants and other stakeholders have until 13 August to submit responses.

If adopted, the changes would allow portfolio managers to take explicit bearish positions through derivatives and enable more structured long-short strategies within managed accounts.