Capital markets regulator Sebi has amended rules governing portfolio managers, under which they will not be allowed to invest clients' funds in unrated securities of their related parties or associates.

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The move is aimed at enhancing prudential norms for investments by portfolio managers, including investments in associates and related parties.

Under the notified rules, the portfolio manager will have to ensure compliance with the prudential limits on investments as specified by the regulator. The limits will be applicable at the client level at the time of making investments by the portfolio managers.

"The portfolio manager shall not be allowed to invest clients' funds in unrated securities of their related parties or their associates," the Securities and Exchange Board of India (Sebi) said in a notification on Monday.

Also, such a manager will have to put in place an alert-based system to monitor compliance with the prudential limits on investments and will have to ensure investment of its client's funds on the basis of the credit rating of securities as specified by the regulator.

The portfolio manager can make investments in the securities of its related parties or its associates only after obtaining the prior consent of the client in such a manner as specified by Sebi.

The requirement for obtaining consent will not apply to such portfolio managers as specified by the regulator.

Also, Sebi has said that a portfolio manager will have to provide the client with a disclosure document containing details of the investment of the client's funds by it in the securities of its related parties or associates and the details of its diversification policy.

The regulator defined "associate" as a body corporate in which a director or partner of the portfolio manager holds, either individually or collectively, more than 20 per cent of its paid-up equity share capital or partnership interest.

The new rules will become effective from September 21.