SEBI Unveils Major Overhaul of Portfolio Manager Rules, Expands Derivatives Access

NEW DELHI — The Securities and Exchange Board of India (SEBI) approved a comprehensive overhaul of the Portfolio Management Services (PMS) rules on 25 September 2026, a move that widens investment avenues for both domestic and foreign portfolio managers. The revised framework also introduces a new settlement mechanism aimed at improving efficiency in the derivatives market.

Key Changes to PMS Rules

Under the new rules, portfolio managers are now permitted to invest in a broader range of instruments, including non‑agricultural derivatives and commodity derivatives. The changes specifically allow foreign portfolio investors (FPIs) to participate in these markets, a departure from the previous restrictions that limited FPI exposure to a narrower set of securities.

SEBI’s decision follows a review of the existing PMS framework, which had been in place since 2014. The board cited the need to keep India’s asset‑management sector competitive and aligned with global best practices. The updated rules also introduce stricter compliance requirements for PMSs, such as enhanced disclosure norms and tighter risk‑management protocols.

New Settlement Framework

The overhaul includes a new settlement framework designed to streamline the clearing and settlement of derivatives trades. While the exact mechanics of the framework are detailed in SEBI’s circular, the core objective is to reduce settlement risk and improve liquidity in the derivatives market. The framework is expected to be implemented in phases, with a pilot period slated for the first quarter of 2027.

Impact on Foreign Portfolio Investors

Previously, FPIs were largely excluded from trading in non‑agricultural derivatives. The updated rules now allow them to invest in these instruments, potentially increasing foreign capital inflows into the Indian derivatives market. The move is part of SEBI’s broader strategy to attract more international participation in India’s capital markets.

According to the New Indian Express, the changes also extend FPI access to commodity derivatives, a sector that has traditionally been dominated by domestic players. This expansion is expected to diversify the investment options available to portfolio managers and enhance the depth of the derivatives market.

Regulatory Context

SEBI’s latest circular follows a series of regulatory updates aimed at strengthening market infrastructure. Earlier this year, the board had announced reforms to the National Stock Exchange’s settlement system, and the new PMS rules are part of a coordinated effort to modernise India’s financial market framework.

In a statement released by SEBI, the board highlighted that the changes would “enhance market efficiency and provide portfolio managers with greater flexibility to diversify portfolios.” The statement also noted that the new settlement framework would be designed to align with international standards.

Industry Reaction

Industry analysts have welcomed the broadened scope for portfolio managers. A spokesperson for a leading asset‑management firm said that the changes would “enable a more diversified approach to portfolio construction.” The firm also noted that the new settlement framework could reduce operational costs for traders.

However, some market participants have expressed concerns about the potential for increased volatility in the derivatives market. A senior analyst at a major brokerage firm cautioned that the expanded exposure to commodity derivatives could “introduce new risk dynamics” that would need to be managed carefully.

Implementation Timeline

SEBI has set a phased implementation schedule. Portfolio managers will be required to comply with the new rules by 1 January 2027, while the settlement framework will be rolled out in stages, beginning with a pilot in the first quarter of 2027. SEBI has also announced a series of workshops and guidance documents to assist firms in adapting to the new regulatory environment.

Conclusion

The overhaul of PMS rules and the introduction of a new settlement framework represent a significant step in SEBI’s effort to modernise India’s capital markets. By expanding FPI access to non‑agricultural and commodity derivatives and tightening settlement processes, the board aims to enhance market depth, improve risk management, and attract greater foreign investment.