News: SEBI proposes a framework for domestic mutual funds (MFs) to invest in overseas counterparts or unit trusts (UTs) that invest a portion of their assets in Indian securities.
Background:
- Current Restrictions: Mutual funds in India are not explicitly permitted to invest in overseas mutual fund units with exposure to Indian securities.
- Purpose Defeated: Significant exposure to Indian securities in overseas funds negates the purpose of making overseas investments.
- Cost-Effectiveness: Indirect investment through overseas instruments is not cost-effective for end-investors compared to direct investment in Indian securities, thus serving no purpose.
Need for the Proposed Framework
- SEBI observes that Indian securities are attractive to foreign funds, leading to several international indices, ETFs, MFs, and UTs allocating assets to Indian securities.
- Indian mutual funds diversify portfolios by launching ‘feeder funds’ investing in overseas instruments such as MF units, UTs, ETFs, and index funds.
- This aids global investments and diversification.
Proposals by SEBI:
- Investment Cap: Overseas instruments investing in India capped at 20% of net assets to balance facilitating investments and preventing excessive exposure.
- Proportional Gains: Indian mutual funds must ensure all investors in the overseas instrument receive gains proportionate to their contribution without preference.
- Independent Management: Overseas instruments must be managed by an officially appointed, independent investment manager/fund manager making autonomous investment decisions without external influence.
- Transparency: Public disclosures of overseas MF/UT portfolios periodically for transparency.
- Conflict of Interest: No advisory agreements between Indian mutual funds and overseas MF/UTs to prevent conflicts of interest and undue advantage.
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