Sebi, the market regulator, authorized mutual funds (MFs) on Monday to invest in overseas mutual funds or unit trusts that invest a portion of their assets in Indian securities.
This is subject to such overseas funds' overall exposure to Indian securities not exceeding 25% of their net assets.
The change is intended to make it easier to invest in foreign MF/UTs, increase transparency in the investment process, and allow MFs to diversify their overseas assets, Sebi said in a circular. Sebi has announced that the new framework will take effect immediately.
Additionally, MF schemes must ensure that all investors' contributions to an offshore MF/UT are merged into a single investment vehicle with no side vehicles.
An offshore mutual fund or unit trust's corpus should be a blind pool with no segregated portfolios, guaranteeing that all investors have equal and proportionate interests 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", according to Sebi.
To avoid conflicts of interest, the regulator prohibits advisory arrangements between Indian mutual funds and the underlying overseas mutual funds.
According to the circular, Sebi stated "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."
When making new or subsequent investments, Indian MF schemes must guarantee that the underlying overseas MF/UTs have no more than 25% exposure to Indian stocks.
Following the investment, if the exposure exceeds the threshold, Indian MF schemes will be allowed a six-month observation period from the date of publicly accessible information of such breach to monitor any portfolio rebalancing activity by the underlying foreign MF/UT.
During the observance period, the Indian MF scheme will not make any new investments in such overseas MF/UTs, but will be able to resume such investments if their exposure to Indian equities falls below the 25% restriction.
