Regulatory Update on Foreign Investments by Indian Mutual Funds
The Securities and Exchange Board of India (SEBI) has issued a directive to the Association of Mutual Funds in India (AMFI) to cease new inflows into overseas exchange-traded funds (ETFs) starting April 1. This measure is in response to the imminent exhaustion of the current USD 1 billion limit set by the Reserve Bank of India (RBI) for such investments.
Key Details of the Directive
- Investment Cap Restrictions:
- Previous Caps: Initially, mutual funds (MFs) were restricted from subscribing to fresh overseas stocks under a SEBI January 2022 directive. However, this was partially relaxed later with an overall industry cap of USD 7 billion due to market demands.
- Exhaustion of Limits: The specific USD 1 billion cap for ETFs abroad is close to being fully utilized, prompting this new directive to halt further inflows.
- Scope of Current Investments:
- Managed Funds: There are 13 international mutual fund schemes that manage a total of Rs 7,743 crore in passive funds, alongside numerous others that invest in international ETFs.
- Investment Avenues: Indian MFs can invest overseas directly or through foreign-managed ETFs.
- Industry and Regulatory Context:
- Demand for Increased Limits: AMFI and various fund houses have advocated for higher investment limits to diversify investor portfolios and leverage rallies in developed markets.
- Outdated Limits: The current USD 1 billion cap was established back in 2007-08 and has not been updated, despite significant growth in India’s foreign exchange reserves since then.
- Valuation Rules: SEBI requires that the utilization of overseas investment limits be valued based on the acquisition cost rather than the current market valuation, affecting the calculation of remaining headroom for investments.
- Operational Implications:
- Fund House Caps: Mutual funds are currently accepting investments in overseas schemes based on the available headroom within these predefined caps, which are now under scrutiny for adequacy and relevance.
Implications for Investors
This suspension is likely to affect investors looking to diversify into international markets through Indian MFs, particularly in passive investment vehicles like ETFs. The halt is intended to prevent overshooting the prescribed limits, which could have broader implications for market stability and regulatory compliance.
About SEBI
- Chairperson: Madhabi Puri Buch
- Establishment: Constituted in 1988 and became a statutory body in 1992.
- Headquarters: Mumbai, Maharashtra
This decision underscores SEBI’s commitment to maintaining strict control over external investments by Indian entities and its role in safeguarding the interests of domestic investors while balancing market expansion and international investment opportunities.
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