Sebi has released guidelines for domestic mutual funds to invest in overseas funds or unit trusts with exposure to Indian securities
The Securities and Exchange Board of India (Sebi) on November 4, 2024 announced that it has allowed mutual funds to invest in overseas mutual funds or unit trusts that allocate a portion of their assets to Indian securities. However, there is stipulation that such exposure should not exceed 25 per cent of their net assets, Sebi said in a circular.
The move is aimed at facilitating ease of investment in overseas mutual funds or unit trusts and bring about transparency in the manner of the investment, while also enabling mutual funds to diversify their overseas investments.
The new framework will come into force with immediate effect, Sebi said.
Background
The new framework requires that all contributions from Indian investors to overseas mutual funds or unit trusts are pooled into a single investment vehicle, without any side vehicles. The corpus of an overseas mutual fund or unit trust should be a blind pool with no segregated portfolios, thus ensuring that all investors have equal and proportionate rights in the fund.
Earlier in May 2024, Sebi had commented that it had observed increased international investment in Indian securities due to strong growth prospects.
As of April 2024, the MSCI Emerging Markets Index had an 18 per cent weight in Indian stocks, following which Sebi increased the cap for overseas funds. However, it kept the 25 per cent cap to ensure the fund remains true to label and cost effective.
New Proposal: Key Details
Sebi said in the circular that “all investors in the overseas MF/UT have pari-passu and pro-rata rights in the fund,” In other words, they will receive a share of returns and/or gains from the fund in proportion to their contribution and will have pari-passu rights.
Further such overseas mutual funds and unit trusts must disclose their portfolios at least on a quarterly intervals to the public to maintain transparency, Sebi said.
Additionally, Sebi has prohibited any advisory agreements between Indian mutual funds and the foreign funds to avoid any conflict of interest.
When investing, Indian mutual funds must verify that the overseas mutual funds or unit trusts maintain their exposure to Indian securities within the stipulated limit. If this threshold is exceeded, a six-month monitoring period will be permitted for the mutual fund to do any necessary portfolio realignment, during which time the Indian mutual funds will not be able to make new investments in those foreign options.
Investment can resume once the foreign funds’ exposure to Indian securities falls back below the 25 per cent limit.