SEBI released a consultation paper proposing a framework to facilitate investments by domestic mutual funds (MFs) in their overseas counterparts and unit trusts with exposure to  Indian securities.

Can domestic mutual funds invest in their overseas counterparts?

• Ambiguity: The existing framework does not explicitly permit domestic Mutual Funds to invest in overseas MF/UTs with exposure to Indian securities.
• Feeder Funds: Indian mutual funds diversify their portfolios by launching ‘feeder funds’ which invest in overseas instruments such as (units of) MF, UTs, ETFs and/or index funds.
• Purpose:  To diversify and ease the path to make global investments. 

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SEBI’s Proposal

• Upper limit: Overseas instruments being considered must not have an exposure of more than 20% of their net assets in Indian securities. 
  • To strike a balance between facilitating investments in overseas funds with exposure to India and preventing excessive exposure
• Breach of Cap: If the 20% cap is breached, the Indian mutual fund scheme which is investing in the overseas fund would slip into a 6-month observance period which will be utilized by the overseas fund to rebalance its portfolio.
  • The domestic mutual fund cannot undertake any fresh investment in the overseas MF/UT, during this period. Further investment in the overseas instrument would be allowed only when the exposure drops below the limit.  
• Investment Vehicle: SEBI’s proposal has sought that Indian mutual funds ensure contributions of all investors of the overseas MF/UT is pooled into a single investment vehicle and not a parallel instrument alongside the main instrument with varying exposure. 
• Indian mutual funds must also ensure that all investors of the overseas instrument are receiving gains proportionate to their contribution and in no order of preference.  
• Overseas Instrument Management: The overseas instrument needs to be managed by an “officially appointed, independent investment manager or fund manager” who is actively involved in making all investment decisions for the fund.
  • SEBI says that these investments should be made autonomously by the manager without any influence from the investors or undisclosed parties.  
• Transparency: SEBI seeks  public disclosures of the portfolios of such overseas MF/UTs periodically for the sake of transparency.
• SEBI has warned against the existence of any advisory agreement (business agreement) between the Indian mutual fund and the overseas MF/UT. 
  • This is to prevent conflict of interest and avoid any undue advantage.  
• Condition for Liquidation: The Indian mutual fund must liquidate its investment in the overseas instrument within 6 months, if the portfolio is not rebalanced within the observation period of 6 months.
  • It would be debarred  to accept any fresh subscriptions to the scheme, launch any new scheme or levy any exit load (the fee for redeeming the mutual fund before a specific date) on its investors exiting the scheme

Advantages

• Diversification: Investments in international markets provide diversification opportunities to Indian investors, by providing investment opportunities in sectors or industries that may not be available in the Indian listed market space.
  • It will be an useful avenue for diversifying investor portfolios as well as generating significant risk adjusted returns
• It will enable investors to take desired exposure in overseas securities

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