SEBI Issues Consultation Paper Allowing Indian Mutual Funds To Invest In Overseas Funds

The Securities and Exchange Board of India (SEBI) announced its intention to allow Indian mutual funds to invest in overseas funds, provided these funds have a limited exposure to Indian securities.

Under the existing regulations, SEBI-registered mutual funds can invest in various overseas securities. These include American Depository Receipts (ADRs), Global Depository Receipts (GDRs), equity of overseas companies, and foreign government securities, among others. However, investments in overseas mutual funds or unit trusts (MF/UTs) that have any exposure to Indian securities are not explicitly permitted. This regulatory gap has led to hesitation among Indian mutual funds when considering investments in such overseas funds.

The proposed policy aims to bridge this gap by allowing Indian mutual funds to invest in overseas MF/UTs that have an exposure to Indian securities, with a strict cap. According to SEBI's consultation paper, the exposure of these overseas funds to Indian securities should not exceed 20% of their net assets.

SEBI has outlined several conditions to ensure that these investments remain compliant and transparent:

1. Pooling of Investments: The contributions of all investors in the overseas MF/UT must be pooled into a single investment vehicle, ensuring no side-vehicles or segregated portfolios.
2. Independent Management: The overseas MF/UT should be managed by an independent investment manager who is actively involved in making all investment decisions.
3. Periodic Disclosures: The overseas MF/UT must disclose their portfolios periodically to maintain transparency.
4. No Advisory Agreements: There should be no advisory agreements between Indian mutual funds and the underlying overseas MF/UTs to prevent conflicts of interest.

SEBI has also proposed measures to handle scenarios where the exposure to Indian securities exceeds the 20% cap post-investment. If the exposure breaches this limit, Indian mutual funds will have a six-month observance period to monitor and wait for the overseas MF/UT to rebalance its portfolio. During this period, no fresh investments in the overseas MF/UT will be allowed. If the exposure remains above 20% after the observance period, Indian mutual funds will have an additional six months to liquidate their investments.

SEBI's consultation paper is currently open for public comments, with a deadline for submissions set for June 7, 2024. The regulator is seeking feedback on various aspects of the proposal, including the appropriateness of the 20% exposure limit and the additional criteria for investment in overseas MF/UTs.

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