SEBI allows mutual funds to invest in overseas funds with exposure to Indian securities

New Delhi: Markets regulator Sebi on Monday allowed mutual funds (MFs) to invest in overseas mutual funds or unit trusts that invest a specific portion of their assets in Indian securities.

This is subject to the total exposure to Indian securities by such overseas funds not exceeding 25 per cent of their net assets.

The move is aimed at facilitating ease of investment in overseas MF/UTs, bringing transparency in the manner of investment, and enabling MFs to diversify their overseas investments, SEBI said in a circular.

The new framework will come into force with immediate effect, the Securities and Exchange Board of India (SEBI) said.

Also, MF schemes are required to ensure that all investors' contributions to an overseas MF/UT are combined into a single investment vehicle without any side vehicles.

The corpus of an overseas MF/UT should be a blind pool with no segregated portfolios, ensuring all investors have equal and proportionate rights in the fund.

"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," Sebi said.

The regulator has barred advisory agreements between Indian MFs and the underlying overseas MFs to prevent conflicts of interest.

In its circular, SEBI said, "Indian mutual fund schemes may also invest in overseas MF/UTs that have exposure to Indian securities, provided that the total exposure to Indian securities by these overseas MF/UTs shall not be more than 25 per cent of their assets." At the time of making investments (both fresh and subsequent), Indian MF schemes will have to ensure that the underlying overseas MF/UTs do not have more than 25 per cent exposure to Indian securities.

Subsequent to the investment, if the exposure breaches threshold, an observance period of six months from the date of publicly available information of such breach would be permitted to Indian MF schemes for monitoring of any portfolio rebalancing activity by the underlying overseas MF/UT.

During the observance period, the Indian MF scheme would not undertake any fresh investment in such overseas MF/UT and can resume their investments in such overseas MF/UT in case the exposure to Indian securities by such overseas MF/UT falls below the limit of 25 per cent.