Currently, there is ambiguity regarding rules on investments in such overseas funds. This deters mutual funds from investing in those overseas mutual funds and index funds that invest in a basket of countries, including India.
Sebi said local mutual fund schemes may invest in such overseas mutual funds that have a total exposure to Indian securities of not more than 20% of their net assets.
The exposure of the MSCI Emerging Market Index (MEMI) to Indian securities has shown a steady increase over the years, rising from about 8% in March 2018 to 15.88% in October 2023.
“Given the country’s robust economic prospects, there can be further increase in allocation toward Indian securities by overseas funds/indices. Thus, to strike a balance between facilitating investments in overseas funds with exposure to India and preventing excessive exposure, a limit of 20% is deemed appropriate,” Sebi said in a discussion paper.
Sebi has also proposed certain safeguards for such investments.Contribution of all investors to the overseas mutual fund is pooled into a single investment vehicle, without presence of any side-vehicles. Also, corpus of the overseas mutual fund should be a common portfolio and all investors should receive a share of returns from the fund in proportion to their contribution, it said.Besides, the overseas mutual fund should be managed by an independent fund manager.
“This ensures that the investments are made autonomously by the investment manager/fund manager, without influence from the investors or undisclosed parties,” Sebi said.
Also, such overseas mutual funds should disclose their portfolios periodically to the public and there shouldn’t be any advisory agreements between Indian mutual funds and underlying overseas fund houses to prevent conflict of interest, Sebi said.
Following the investment, if the exposure by an underlying overseas MF to Indian securities exceeds 20% of their NAV, an observance period of six months from the date of publicly available information of such breach would be allowed to Indian MF scheme.