Sebi proposes to allow mutual funds to invest in overseas funds with exposure to Indian markets

SEBI has floated a consultation paper on facilitating investments by Indian mutual funds in such overseas funds that invest a certain portion of their assets in Indian securities.

As per the present regulatory framework, SEBI registered Mutual Funds are allowed to invest in the specified eligible overseas securities for its overseas investment such as equity of overseas companies listed on recognized stock exchanges overseas and foreign debt securities in the countries with fully convertible currencies amongst others.

The current framework does not explicitly permit Indian Mutual Funds to invest in overseas MFs with exposure to Indian securities. Therefore, it is understood that many Mutual Funds in the industry avoid investing in such overseas MF that have any kind of exposure to Indian securities.

Considering the strong economic growth prospects of India, Indian securities offer an attractive investment opportunity for foreign funds. Accordingly, various international indices, exchange-traded funds (ETFs), MFs allocate a portion of their assets to Indian securities.

For instance, as of April 30, 2024, the MSCI Emerging Markets Index has 18.08% weightage to Indian securities. Similarly, JP Morgan’s ‘Emerging Markets Opportunities Fund’ holds approximately 15% in Indian investments, according to its latest factsheet as on March 31, 2024.3.3.

In order to diversify the portfolio, and as part of the overseas fund of funds (‘FoFs’)schemes, Indian Mutual Funds often invest in overseas securities including units of overseas MF/UTs, ETFs and index funds.

However, ambiguity regarding investments in such overseas funds that may invest a certain portion of their funds in Indian securities deters Mutual Funds from investing in those overseas MF, ETFs and index funds that invest in a basket of countries, which may include India.

SEBI is of the view that there appears to be merit in considering allowing investment by Indian Mutual Funds in such overseas funds that have limited exposure to Indian securities.

In order to facilitate investments in such overseas MFs, it may be prudent to permit Indian Mutual Funds to invest in such overseas MFs having certain limited exposure to Indian securities. Additionally, putting adequate safeguards for such investments would keep Indian FoFs true to their label as well as enable investors to take desired exposure in overseas securities.

Based on the consultation with industry stakeholders, a proposal on allowing investment by Indian Mutual Funds in such overseas funds that invest a certain portion of their assets in Indian Securities is as follows:

The Indian Mutual Fund schemes may invest in such overseas MF that have exposure to Indian Securities, provided that the total exposure to Indian securities by such overseas MF/UTs shall not be 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 approximately 8% in March 2018 to 15.88% in October 2023. Given the country’s robust economic prospects, there can be a 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.

The objective of this consultation paper is to seek comments from the public on the proposal of facilitating investments by Indian Mutual Funds in such Overseas Mutual Funds that invest a certain portion of their assets in Indian securities. Public comments can be sent to Sebi until June 7, 2024.