SEBI’s Proposal for Indian Mutual Funds and Overseas Investments (GS Paper 3, Economy)
Context
- SEBI (Securities and Exchange Board of India) has put forth a framework to facilitate investments by domestic mutual funds (MFs) in overseas counterparts or unit trusts (UTs) that invest in Indian securities.
Background
- Currently, Indian mutual funds face restrictions on investing in overseas mutual fund units with exposure to Indian securities.
- SEBI's proposal aims to address this limitation and enhance investment opportunities for Indian funds.
Need for the Proposed Framework
- SEBI recognizes the attractiveness of Indian securities for foreign funds, leading to increased international investment in Indian assets.
- To leverage this opportunity and foster global investments, SEBI proposes measures to streamline investments by Indian mutual funds in overseas instruments.
Proposals by SEBI
1. Cap on Investments: SEBI suggests capping the investment limit for overseas instruments in India at 20% of their net assets, striking a balance between facilitating investments and preventing excessive exposure.
2. Investor Equity: Indian mutual funds must ensure that all investors of overseas instruments receive gains proportionate to their contributions, without preference.
3. Independent Management: SEBI mandates that overseas instruments must be managed by officially appointed independent investment managers, ensuring autonomy in investment decisions.
4. Transparency: Public disclosure of overseas MF/UT portfolios is required periodically to maintain transparency.
5. Conflict Prevention: SEBI prohibits advisory agreements between Indian mutual funds and overseas MF/UT to prevent conflicts of interest and ensure fair practices.
Breach Management
- In case of breach of the 20% investment limit, a 6-month observance period is initiated.
- During this period, the overseas fund must rebalance its portfolio to adhere to the cap.
- If not rebalanced within the stipulated time, Indian mutual funds must liquidate their investments in the overseas instrument within 6 months.
Concluding Remarks
- SEBI's proposals aim to broaden investment horizons for Indian mutual funds, allowing for diversification and access to international markets.
- These measures not only enhance portfolio diversification but also offer opportunities for superior risk-adjusted returns, benefiting Indian investors and the financial markets as a whole.
