SEBI proposes to facilitate domestic MFs to invest in overseas funds
The regulator said with strong economic growth prospects of India, domestic securities offer attractive investment opportunities for foreign funds. Various international indices, exchange traded funds (ETFs), MFs, UTs allocate a portion of their assets to Indian securities.
SEBI proposes to allow investment by domestic mutual funds in overseas funds (File Image) Market regulator Securities and Exchange Board of India (SEBI) on Friday proposed to allow investment by domestic mutual funds in overseas funds that have a limited exposure to Indian securities.
At present SEBI registered mutual funds are allowed to invest in overseas securities, including American Depository Receipts (ADRs) / Global Depository Receipts (GDRs) issued by Indian or foreign companies, equity of overseas companies listed on recognized stock exchanges overseas, initial and follow on public offerings for listing at recognized stock exchanges overseas and government securities where the countries are rated not below the investment grade.
“The Indian Mutual Fund schemes may invest in such overseas MF/Unit Trust (UTs) that have an exposure to Indian securities, provided that the total exposure to Indian securities by such overseas MF/UTs shall not be more than 20 per cent of their net assets,” SEBI said in a consultation paper.
The regulator said with strong economic growth prospects of India, domestic securities offer attractive investment opportunities for foreign funds. Various international indices, exchange traded funds (ETFs), MFs, UTs allocate a portion of their assets to Indian securities.
As of April 30, 2024, the MSCI Emerging Markets Index (MEMI) has 18.08 per cent weightage to Indian securities. Similarly, JP Morgan’s ‘Emerging Markets Opportunities Fund’ holds approximately 15 per cent in Indian investments, according to its latest factsheet as on March 31, 2024.
The regulator said the exposure of the MSCI Emerging Market Index (MEMI) to Indian securities has shown a steady increase over the years, rising from approximately 8 per cent in March 2018 to 15.88 per cent in October 2023. Given the country’s robust economic prospects, there can be further increase in allocation toward Indian securities by overseas funds/indices.
“Thus, to strike a balance between facilitating investments in overseas funds with exposure to India and preventing excessive exposure, a limit of 20 per cent is deemed appropriate,” the paper suggested.
It further said that subsequent to the investment, if the exposure by an underlying overseas MF/UTs to Indian securities exceeds 20 per cent of their net assets, an observance period of 6 months from the date of publicly available information of such breach should be permitted to domestic mutual fund schemes for monitoring of any portfolio rebalancing activity by the underlying overseas MF/UT.
During the observance period, the domestic mutual fund scheme should not undertake any fresh investments in such overseas MF/UT, and may resume their investments in case the exposure to Indian securities by such overseas MF/UT falls below the limit of 20 per cent, the regulator said.
While investing in overseas MF/UTs, the Indian mutual fund schemes should ensure that the contribution of all investors of the overseas MF/UT is pooled into a single investment vehicle, without presence of any side-vehicles and the corpus of the overseas MF/UT shall be a blind pool with no segregated portfolios.
SEBI suggested that the overseas MF/UT should be managed by an officially appointed, independent investment manager/fund manager who is actively involved in making all investment decisions for the fund.
These overseas MF/UTs should also disclose their portfolios periodically to the public to maintain transparency, it said.
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