Proposal by SEBI on Domestic MFs to invest in their Overseas Counterparts

Proposal by SEBI on Domestic MFs to invest in their Overseas Counterparts

Sub: Economy

Sec: Capital market

Tag: SEBI on Domestic MFs to invest in their Overseas Counterparts

The Securities and Exchange Board of India (SEBI) on May 17 floated a consultation paper proposing a framework for facilitating investments by domestic Mutual Funds (MFs) in their overseas counterparts.

Framework’s Purpose

• Strong Economic Growth: SEBI notes India’s strong economic growth prospects and observes that Indian securities offer attractive investment opportunities for foreign funds.
• International Exposure: Several international indices, ETFs, MFs, and UTs allocate a part of their assets towards Indian securities. For instance, the MSCI Emerging Markets Index holds 18.08% exposure to Indian securities.
• Diversification: Indian mutual funds diversify their portfolios by launching feeder funds that invest in overseas instruments such as units of MF, UTs, ETFs, and/or index funds.
• Ambiguity: There is ambiguity about investments with Indian exposures, deterring domestic MFs from investing in these instruments.

Proposals by SEBI

• Upper Limit Cap: The upper limit for investments made by overseas instruments in India is capped at 20% of their net assets. This cap is deemed appropriate to balance facilitating investments in overseas funds with exposure to India and preventing excessive exposure.
• Pooled Investment Vehicle: Indian mutual funds must ensure that contributions of all investors of the overseas MF/UT are pooled into a single investment vehicle.
• Proportional Gains: All investors of the overseas instrument must receive gains proportionate to their contribution.
• Autonomous Management: Investments should be made autonomously by the manager of the overseas instrument without any influence from investors or undisclosed parties.
• Public Disclosures: SEBI seeks periodic public disclosures of the portfolios of such overseas MF/UTs for transparency.

Breaching the Investment Limit

• Observance Period: If the overseas instrument breaches the 20% limit, the Indian mutual fund scheme investing in the overseas fund will enter a six-month observance period to rebalance its portfolio.
• Investment Suspension: Further investment in the overseas instrument will be allowed only when the exposure drops below the limit.
• Liquidation Requirement: If the portfolio is not rebalanced within this period, the MF must liquidate its investment in the overseas instrument within six months.