Sebi permits mutual funds to invest in overseas funds with limit on exposure to Indian securities

The Securities and Exchange Board of India (Sebi) has permitted mutual funds (MFs) to invest in overseas mutual funds or unit trusts that invest a portion of their assets in Indian securities.

Through this regulation, Sebi aims to ease investments in overseas mutual funds and bring transparency to investments.

“In order to facilitate ease of investment in overseas MF/UTs, to bring transparency in the manner of investment, and to enable Mutual Funds to diversify their overseas investments, the following has been decided based on feedback received from the industry, consultation with Mutual Fund Advisory Committee and public consultation,” according to a Sebi circular.

These overseas funds' total exposure to Indian securities should not exceed 25 per cent of their net assets.

“At the time of making investments (both fresh and subsequent), Indian mutual fund schemes shall ensure that the underlying overseas MF/UTs do not have more than 25 per cent exposure to Indian securities,” Sebi said.

If the exposure goes beyond 25 per cent, an observance period of six months from the date of publicly available information of such a breach will be allowed for the Indian mutual fund scheme to rebalance the assets. During this period, undertaking fresh investments in overseas mutual funds and unit trusts will not be permitted.

If the underlying assets are not rebalanced in the observance period, the Indian mutual fund scheme will liquidate its investment in the next six months from the end of the observance period.

The new provisions will be implemented immediately.

Single investment vehicle 

The contributions of the investors will be combined into a single investment vehicle.

“Contribution of all investors of the overseas MF/UT is pooled into a single investment vehicle, with no side-vehicles including segregated portfolios, sub-funds or protected calls,” Sebi said.

The overseas MF/UT corpus should not have segregated portfolios making sure that all investors should have proportionate rights.

“All investors in the overseas MF/UT have pari-passu and pro-rata rights in the fund, i.e. they receive a share of returns/gains from the fund in proportion to their contribution and have pari-passu rights,” the regulator said.

There will not be advisory agreements among Indian mutual funds and underlying overseas MF/UTs to avoid conflict of interest.