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Mutual Funds Investments UPSC NOTE

 

  • The Securities and Exchange Board of India (SEBI) on May 17 floated a consultation paper proposing a framework for facilitating investments by domestic Mutual Funds (MFs) in their overseas counterparts, or Unit Trusts (UTs) that invest a certain portion of their assets in Indian securities.

Purpose

  • Noting India’s strong economic growth prospects, SEBI observes that Indian securities offer an attractive investment opportunity for foreign funds.

  • SEBI says this has led to several international indices, exchange traded funds (ETFs), MFs, and UTs allocating a part of their assets towards Indian securities

  • In the consultation paper, MSCI Emerging Markets Index was noted to hold 18.08% exposure to Indian securities.

  • Indian mutual funds, somewhat conversely, diversify their portfolios by launching ‘feeder funds’ which invest in overseas instruments such as (units of) MF, UTs, ETFs and/or index funds

  • Other than diversification, it eases the path to make global investments. 

  • However, ambiguity remains about investments which have Indian exposures, which deters domestic MFs from investing in these instruments

  • SEBI’s cumulative assessment sees merit in potentially allowing investments of this kind with “limited exposure to Indian securities.” 

  • Within the proposed framework, the markets regulator also intends to place essential safeguards which would keep the Indian instruments “true to their label” and enable investors to take desired exposure in overseas securities

  • If the fund has significant exposure to Indian securities, the purpose of making an overseas investment is defeated.

SEBI proposals 

  • Significantly, the upper limit for investments made by overseas instruments (in India) has been capped at 20% of their net assets

  • That is, overseas instruments being considered must not have an exposure of more than 20% in Indian securities

  • Deeming the cap “appropriate,” SEBI explains that this would help “strike a balance between facilitating investments in overseas funds with exposure to India and preventing excessive exposure.” 

  • The markets regulator has also sought that Indian mutual funds ensure contributions of all investors of the overseas MF/UT is pooled into a single investment vehicle. 

  • Other than this, 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

  • SEBI stresses that these investments are to be made autonomously by the manager (of the overseas instrument) without any influence from the investors or undisclosed parties

  • SEBI is also seeking public disclosures of the portfolios of such overseas MF/UTs periodically for the sake of transparency

  • Finally, it warns against the existence of any advisory agreement between the Indian mutual fund and the overseas MF/UT. 

  • This is to prevent conflict of interest and avoid any undue advantage.

When overseas instruments breach the limit

  • If the overseas instrument breaches the 20% limit, the Indian mutual fund scheme which is investing in the overseas fund would slip into a six-month observance period

  • This period is to be utilised by the overseas instrument/fund to rebalance its portfolio adhering to the cap

  • Further investment in the overseas instrument would be allowed only when the exposure drops below the limit

  • If the portfolio is not rebalanced within this period, the MF must liquidate its investment in the overseas instrument within six months.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Mutual Funds Investments UPSC NOTE
Mutual Funds Investments UPSC NOTE
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