Securities and Exchange Board of India (SEBI) has directed mutual fund houses to stop accepting contributions into schemes that invest in exchange-traded funds (ETFs) listed on foreign bourses starting April 1, 2024. Sebi directive follows ETFs nearing the Reserve Bank of India's (RBI) prescribed aggregate upper limit of USD 1 billion in ETFs, according to industry officials cited by The Times of India. Previously, international mutual fund (MF) schemes were prohibited from directly investing in foreign instruments. However, now investments in overseas securities, except in overseas ETFs, are allowed to continue until further communication from Sebi.
Commenting on Sebi's directive, Chirag Mehta, Chief Investment Officer at Quantum AMC, said, "Sebi’s directive to mutual fund schemes with investments in ETFs listed on foreign exchanges comes as the Mutual Fund industry reaches close to the investment limit of USD 1 billion set by the regulator for this category. This is reminiscent of the time when the industry had reached the USD 7 bn foreign investment limit and had to suspend flows in funds investing in stocks overseas."
"These limits probably were put in place to limit outflows of foreign currency within a limit to reduce the impact on balance of payments and thereby on the Indian currency. The result will be that these mutual fund schemes will have to limit their inflows. It's been a long time since these limits were set and are probably due for enhancement," he added.
Currently, mutual funds have reached around 84 per cent of the USD 7-billion limit at the total industry level and around 95 per cent of the USD 1-billion cap on ETFs.
Despite numerous appeals to the RBI over the years from fund houses, the central bank has yet to raise the investment limit. In response to inquiries about a possible increase in the limit, the RBI governor stated on January 11, 2024, "We do not question the basis of their request. It is a question of the right time for us to do it. We have just come out of the stress on the exchange rate of the Rupee. We experienced huge outflows. Now things have stabilized, and the Rupee has remained very stable."
Sebi's directive comes at a time when India's foreign exchange reserves are hovering around USD 636 billion, just USD 9 billion short of the all-time high of USD 645 billion recorded in October 2021.
