Sebi Permits MFs To Invest In Overseas Funds With 25% Indian Securities Cap

The Securities and Exchange Board of India (Sebi) has now allowed mutual funds to invest in overseas mutual funds or unit trusts that allocate a portion of their assets to Indian securities. Sebi has capped this exposure, stating that mutual funds can invest up to 25 per cent of the overseas funds’ net assets. 

Sebi explained that this move is aimed at simplifying investments in foreign mutual funds and unit trusts (MFs/UTs) while enhancing transparency. It also enables Indian mutual funds to diversify their overseas investments effectively. Overseas Direct Investment (ODI) refers to investments made by Indian entities in foreign countries.

Additionally, Sebi mandates that mutual fund schemes ensure that all investor contributions to an overseas MF/UT are consolidated into a single investment vehicle, without any side arrangements. This requirement ensures that the corpus of an overseas MF/UT remains a “blind pool” with no separate portfolios, so all investors hold equal and proportional rights in the fund. 

Sebi’s circular states, “All investors in the overseas MF/UT have pari-passu and pro-rata rights in the fund, that is, they receive a share of returns/gains from the fund in proportion to their contribution and have pari-passu rights.”

Sebi has also prohibited advisory agreements between Indian mutual funds and their underlying overseas MFs to avoid potential conflicts of interest. If a mutual fund’s exposure to Indian securities in an overseas fund exceeds the 25 per cent cap after initial investment, Sebi provides a six-month observance period for portfolio rebalancing. 

This observance period begins from the date when the public is informed of the breach, allowing time for the Indian MF schemes to monitor any rebalancing activities by the overseas fund. Portfolio rebalancing is the process of adjusting asset weightings within an investment portfolio to maintain a target allocation.

During the observance period, the Indian mutual fund scheme is prohibited from making any new investments in the overseas MF/UT until the exposure to Indian securities drops below the 25 per cent limit.