Eligible fund manager

An overseas fund might want an Indian manager to run its money. The worry, before 2015, was tax: if the fund's management happened in India, the fund could be treated as having a business connection in India or as resident in India.

Section 9A, inserted in the Income-tax Act after the Union Budget 2015-16, gives a safe harbour. An eligible investment fund set up outside India that invests in India is not deemed to have a business connection and not regarded as resident just because its fund management is done by an eligible fund manager located in India — provided both the fund and the manager meet the section's conditions.

The SEBI (Portfolio Managers) Regulations, 2020 have a separate Chapter III for Eligible Fund Managers. The overseas funds are called Eligible Investment Funds; the India-based managers serving them are Eligible Fund Managers.

Conditions for the eligible fund manager (Chapter 10, section 10.3):

1. Not an employee of the eligible investment fund or a connected person of the fund.
2. Registered as a fund manager or investment adviser under the SEBI (Portfolio Managers) Regulations, 2020, SEBI (Investment Advisers) Regulations, 2013 or SEBI (Mutual Fund) Regulations, 1996.
3. Acting in the ordinary course of business as a fund manager.
4. Together with connected persons, entitled to no more than 20% of the profits the fund earns from transactions carried out through the manager.

Some conditions for the fund: not resident in India; resident of a treaty country or a notified specified country; resident Indian participation not above 5% of corpus (manager's contribution in the first three years up to ₹25 crore ignored); at least 25 members who are not connected persons; no member with connected persons above 10%; 10 or fewer members with connected persons below 50%; no more than 20% of corpus in any one entity; no investment in associates; monthly average corpus of at least ₹100 crore; no business in India; remuneration to the manager not below the prescribed amount. The 25-member, 10% and 50% conditions do not apply to funds set up by foreign governments or central banks, sovereign funds or Category I FPIs.

Under SEBI's Chapter III (Chapter 11): existing portfolio managers compliant with Section 9A can act as EFMs on intimation and declarations to SEBI; new applicants seek registration. Provisions not applicable to EFMs for this activity include the high water mark principle on fees, the fiduciary-capacity obligation, audit of the overseas fund, the agreement requirement, reporting requirements and the ₹50 lakh minimum investment.

EFM obligations include: complying with Section 9A; offering discretionary, non-discretionary or advisory services; material disclosures; segregating each fund's money and securities from other funds and clients; separate books; appointing a custodian (unless the fund already has one); keeping funds in scheduled commercial banks (unless the fund does not intend to invest in Indian securities).

Illustrative figures. A Singapore-based fund wants a Mumbai PMS firm to manage its India portfolio.

Arithmetic: 18 ÷ 450 = 4.0%; 40 ÷ 450 = 8.9%; 80 ÷ 450 = 17.8%.

Because the firm is already a registered portfolio manager, it can begin on intimation to SEBI with declarations. It must segregate this fund's money and securities from its domestic PMS clients. The ₹50 lakh minimum and the high water mark rule do not apply to this mandate.

If instead the manager's entitlement were 25% of profits, the fourth manager condition would fail — and the safe harbour would not apply.

Chapter 10 (Taxation), section 10.3, sets out Section 9A and the conditions for eligible investment funds and eligible fund managers. Chapter 11 (Regulatory, Governance and Ethical Aspects of Portfolio Managers), section 11.4, covers Chapter III of the SEBI PMS Regulations 2020 — who can act as an EFM, which PMS provisions do not apply, and the EFM's obligations. Expect questions on the 20% profit cap, the registration routes and the exempted provisions.

• The profit cap is 20% for the manager with connected persons. The 5% figure is resident Indian participation in the fund; 10% is the single-member cap; 20% is also the single-entity investment cap for the fund.
• Existing portfolio managers act on intimation; new applicants seek registration.
• The ₹50 lakh minimum investment, the high water mark principle and the fiduciary obligation do not apply to EFM activity for eligible investment funds.
• Registration can be under PMS, Investment Adviser or Mutual Fund regulations — not only PMS.
• The 25-member, 10% and 50% conditions are relaxed for government, central bank and sovereign funds and Category I FPIs; the 20% profit cap on the manager is not among the relaxed conditions.
• Stale reference. The workbook cites Section 9A of the Income-tax Act, 1961. The Income-tax Act, 2025 replaced that Act from 1 April 2026 and renumbers its provisions. For the exam, use the workbook's Section 9A.