The SEBI ( Securities and Exchange Board of India ) has issued a circular dated 04.11.2024 detailing fresh guidelines for Indian mutual funds investing in overseas mutual funds (MF) and unit trusts (UT). The new directive, dated November 4, 2024, aims to enhance transparency, cap exposure to Indian assets, and simplify overseas investments for mutual funds while addressing potential risks. This move is part of SEBI’s ongoing efforts to safeguard investor interests and ensure that mutual fund investments align with global standards.
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In addition, the circular mandates that overseas funds holding Indian assets must operate as a blind pool, ensuring that all contributions are pooled into a single investment vehicle with no sub-funds or segregated portfolios. Furthermore, the Overseas MF/UT are to be managed by an independent investment manager/fund manager who is actively involved in making all investment decisions for the fund and are to disclose their portfolios for public appraisal on a quarterly basis.
While Indian Mutual Funds are permitted to invest in overseas securities, it has now been mandated that the total exposure to Indian securities by these overseas MF/UTs shall not be more than 25% of their assets. The intent behind the 25% cap is to mitigate the risk of saturation by foreign investors exclusively in Indian Securities only, providing a means for broader diversification of foreign investments towards other sectors as well.
If it so happens that the Indian Exposure of an overseas fund exceeds 25%, the circular permits a six-month observance period from the last during which fund managers may attempt to rebalance the portfolio. No new investments in the affected overseas fund are permitted during this period.
If rebalancing of the portfolio during this time frame is unfruitful, Indian Mutual Fund Schemes shall be required to liquidate their holdings in the concerned fund within an additional six-month liquidation period. SEBI has provided flexibility for mutual funds to resume investments if the fund’s Indian exposure falls back below 25% within this timeframe.
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In the event the Indian Mutual Fund/ Asset Management Company is unable to rebalance its portfolio within the permitted six-month period, they may be slapped with restrictions barring them from accepting fresh subscriptions in the Mutual Fund Scheme and launching any such new schemes.
While the new rules provide greater investor protection and align Indian mutual funds with global best practices for transparency and diversification, they may also increase the operational responsibilities for asset management companies (AMCs), given the need for diligent monitoring, rebalancing, and compliance with disclosure norms.
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Furthermore, while the exposure cap on Indian assets encourages diversified investments, it could paradoxically restrict investment options for Indian funds seeking opportunities in overseas funds with substantial Indian holdings.
Effective immediately, the SEBI Circular applies to all mutual funds, Asset Management Companies and Unit Trusts involved in the mutual fund sector in India. The change has been sighted to maintain a stable and transparent investment environment aligning with globally accredited investor protection principles while opening new avenues for mutual funds in global markets.
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