𝐒𝐄𝐁𝐈 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐬 𝐚𝐥𝐥𝐨𝐰𝐢𝐧𝐠 𝐈𝐧𝐝𝐢𝐚𝐧 𝐌𝐮𝐭𝐮𝐚𝐥 𝐅𝐮𝐧𝐝 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬 𝐢𝐧 𝐎𝐯𝐞𝐫𝐬𝐞𝐚𝐬 𝐌𝐮𝐭𝐮𝐚𝐥 𝐅𝐮𝐧𝐝𝐬 𝐰𝐡𝐢𝐜𝐡 𝐡𝐚𝐬 𝐞𝐱𝐩𝐨𝐬𝐮𝐫𝐞 𝐭𝐨 𝐈𝐧𝐝𝐢𝐚𝐧 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬

SEBI has recently issued a consultation paper on a proposal that aims to allow Indian Mutual Funds to invest in Overseas Mutual Funds (MFs) or Unit Trusts (UTs) that have limited exposure to Indian securities.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝 𝐚𝐧𝐝 𝐍𝐞𝐞𝐝 𝐟𝐨𝐫 𝐂𝐡𝐚𝐧𝐠𝐞

Presently, the law outlines permissible overseas investments for Indian Mutual Funds. However, it does not explicitly allow investments in overseas MF/UTs with exposure to Indian securities. This ambiguity has led many mutual funds to avoid such investments, thereby limiting their diversification options.

India’s robust economic growth makes its securities an attractive investment opportunity for global funds. Various international indices, ETFs, MFs, and UTs allocate a portion of their assets to Indian securities, recognizing the potential for high returns. In fact, SEBI itself identifies that MSCI Inc. Emerging Markets Index has 18.08% weightage to Indian securities and similarly, J.P. Morgan‘s ‘Emerging Markets Opportunities Fund’ holds approximately 15% in Indian investments. Hence, allowing Indian Mutual Funds to invest in these overseas funds can enhance portfolio diversification and potentially improve returns. However, clarity on the permissible exposure within these funds is crucial to mitigate risks and ensure alignment with fund objectives.

𝐓𝐡𝐞 𝐏𝐫𝐨𝐩𝐨𝐬𝐚𝐥

The proposal outlines several key features:

𝐚) 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐋𝐢𝐦𝐢𝐭𝐬: Indian Mutual Fund schemes may invest in overseas MF/UTs with exposure to Indian securities, provided the exposure does not exceed 20% of their net assets. This ensures that while funds can benefit from India’s growth, the primary focus remains on overseas diversification.

𝐛) 𝐌𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭 𝐈𝐧𝐝𝐞𝐩𝐞𝐧𝐝𝐞𝐧𝐜𝐞: The overseas MF/UT must be managed by an independent investment manager with no advisory agreements with the Indian Mutual Fund, preventing conflicts of interest.

𝐜) 𝐁𝐫𝐞𝐚𝐜𝐡 𝐨𝐟 𝐋𝐢𝐦𝐢𝐭 𝐚𝐧𝐝 𝐑𝐞𝐛𝐚𝐥𝐚𝐧𝐜𝐢𝐧𝐠: If the exposure to Indian securities exceeds 20% post-investment, Indian Mutual Funds have a 6-month observance period to monitor portfolio rebalancing. If rebalancing does not occur, they must liquidate their investments within the following 6 months unless the exposure falls below 20% again.

𝐂𝐨𝐧𝐜𝐥𝐮𝐬𝐢𝐨𝐧

This proposal marks a significant step towards diversifying opportunities for Indian Mutual Funds. By allowing controlled exposure to Indian securities through overseas funds, it aims to optimize returns while maintaining the integrity and primary objectives of these funds.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.