Synopsis:
- Indian mutual funds can now invest in overseas mutual funds or unit trusts with up to 25% exposure to Indian securities.
- Any breach of the 25% exposure limit allows for a six-month rebalancing period.
- Investments must be pooled into a single vehicle for transparency, ensuring all investors have equal rights.
- Advisory agreements between Indian MFs and overseas funds are banned to avoid conflicts of interest.
- The new framework is effective immediately, promoting global diversification for mutual fund portfolios.
The Securities and Exchange Board of India (SEBI) has granted Indian mutual funds (MFs) the ability to invest in overseas mutual funds and unit trusts (MF/UTs) that hold Indian securities, but with strict conditions. The major rule is that these foreign funds must not exceed 25% exposure to Indian securities.
This regulatory change is designed to promote transparency, ease of investment, and encourage diversification of Indian mutual fund portfolios into international markets.
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Key Features of the SEBI Circular
- Investment Exposure Limit:
SEBI’s guidelines specify that Indian mutual funds can invest in overseas MF/UTs, but these funds must limit their exposure to Indian securities to no more than 25% of their net assets. - Observance Period for Breach:
If the exposure limit of 25% is breached after investment, Indian mutual funds will have a six-month observation period to allow the overseas fund to rebalance. During this period, no fresh investments will be allowed in the overseas MF/UTs until their exposure is reduced below the 25% threshold. - Single Investment Vehicle:
SEBI mandates that the investments of all Indian mutual fund investors in an overseas MF/UT must be pooled into a single investment vehicle. The fund cannot have segregated portfolios, sub-funds, or side vehicles. This ensures equal rights for all investors and guarantees proportional returns based on the investment amount. - Pari-Passu and Pro-Rata Rights:
The circular emphasizes that all investors in the overseas MF/UT should receive pari-passu (equal footing) and pro-rata (proportional to their investment) rights. This ensures that all investors share in the returns and gains of the fund in direct proportion to their contributions. - Conflict of Interest Prevention:
To avoid potential conflicts of interest, SEBI has prohibited any advisory agreements between Indian mutual funds and the underlying overseas MF/UTs. This ensures that investment decisions are made without bias or external influence.
Immediate Implementation
The new framework is effective immediately, meaning that mutual funds wishing to invest in overseas MF/UTs with Indian securities exposure must adhere to these new regulations without delay.
Purpose of the New Guidelines
The primary goal of these changes is to facilitate Indian investors’ access to international markets while ensuring transparency and proper monitoring. It allows Indian mutual funds to diversify into global investments, but the exposure to Indian securities will remain tightly controlled to maintain a balanced and risk-mitigated portfolio.
