Investments in Overseas Mutual Funds/ Unit Trusts by Indian Mutual - 4th November 2024 - Securities and Exchange Board of India - Gazette Notification PDF
Issued by Securities and Exchange Board of India
Read or download the official PDF of this gazette notification issued by the Securities and Exchange Board of India on 4th November 2024.
Executive Summary & Key Takeaways
Executive Summary: This circular, effective November 4, 2024, addresses investments in overseas Mutual Funds/Unit Trusts (MFUTs) by Indian Mutual Funds. It aims to ease investment, increase transparency, and enable diversification in overseas investments. The circular outlines conditions for investing in overseas MFUTs with exposure to Indian securities, including limits, monitoring, and rebalancing requirements, with potential consequences for non-compliance.
Key Points / Main Content:
Investment by Schemes:
- Indian Mutual Fund schemes can invest in overseas MFUTs with exposure to Indian securities, provided that the total exposure does not exceed 25% of their assets.
- Overseas MFUTs must pool contributions into a single investment vehicle without side vehicles.
- All investors in the overseas MFUT must have pari passu and pro-rata rights.
- Overseas MFUTs must be managed by an independent investment manager actively involved in investment decisions.
- Overseas MFUTs must disclose their portfolios publicly at least quarterly.
- No advisory agreements are allowed between Indian Mutual Funds and underlying overseas MFUTs.
Breach of Limit:
- Indian Mutual Fund schemes must ensure that overseas MFUTs do not exceed 25% exposure to Indian securities at the time of investment.
- If exposure exceeds 25% after investment, a 6-month observance period is permitted for monitoring portfolio rebalancing.
- During the observance period, fresh investments in the overseas MFUT are prohibited. Investments may resume if exposure falls below 25%.
Rebalancing of the Portfolio:
- If the overseas MFUT's portfolio is not rebalanced within the 6-month observance period, the Indian Mutual Fund scheme must liquidate its investments within the next 6 months (liquidation period).
- If exposure falls below 25% during the liquidation period, liquidation is not required.
Noncompliance:
- If the Indian Mutual Fund Asset Management Company (AMC) fails to rebalance the portfolio, the AMC will:
- Not be permitted to accept fresh subscriptions in the concerned Indian Mutual Fund scheme.
- Not be permitted to launch any new schemes.
- Not levy exit loads on investors exiting such schemes.
Fundamental Attribute Change:
- Indian Mutual Fund schemes are exempted from the requirement of a fundamental attribute change if:
- The underlying overseas MFUT exceeds 25% exposure to Indian securities.
- The Indian Mutual Fund scheme intends to invest in other overseas MFUTs with similar investment objectives.
- A notice cum addendum is issued to investors.
Impact Analysis:
Mutual Funds/Asset Management Companies (AMCs):
- Impact: Must comply with the new regulations regarding investments in overseas MFUTs, including monitoring exposure limits, rebalancing portfolios when necessary, and adhering to restrictions in case of non-compliance.
- Action Required: Update investment policies and procedures to reflect the new guidelines, monitor overseas MFUT investments for Indian securities exposure, and ensure compliance with rebalancing requirements.
Trustee Companies/Boards of Trustees of Mutual Funds:
- Impact: Oversight responsibility to ensure that the Mutual Funds/AMCs comply with the new regulations.
- Action Required: Review and approve updated investment policies and procedures, and monitor compliance with the new regulations.
Investors in Mutual Funds:
- Impact: Potential changes in investment strategies and portfolio composition of their mutual fund schemes. Protection from potential risks associated with excessive exposure to Indian securities through overseas MFUTs.
- Action Required: Review fund communications (e.g., notice cum addendum) regarding changes in underlying overseas MFUTs, and understand the implications for their investments.
Custodians:
- Impact: Responsible for facilitating and overseeing the investment activities of Mutual Funds in overseas MFUTs, ensuring compliance with regulatory requirements related to permissible investment limits in Indian securities.
- Action Required: Implement necessary system updates to track and monitor the exposure of underlying overseas MFUTs to Indian securities. Update operational procedures to align with the reporting requirements mandated by the circular.
Key Entities Referenced
Securities and Exchange Board of India: Regulatory body for securities market in India, referred to as SEBI.
Mutual Funds: Collective investment schemes that pool money from many investors to purchase securities.
Asset Management Companies: Companies that invest pooled funds from clients, putting capital to work through different investments.
Association of Mutual Funds in India: Industry body of mutual funds in India, referred to as AMFI.
SEBI Master Circular no. SEBI/HO/IMD/IMD-PoD-1/CIR/2024/90: A key regulatory document issued by SEBI related to mutual funds, dated June 27, 2024.
Overseas Mutual Funds/Unit Trusts: Mutual funds and unit trusts based and operating outside of India. Referred to as MFUTs.
Securities and Exchange Board of India Act, 1992: The legislation that established SEBI and defines its powers and functions.
SEBI Mutual Funds Regulations, 1996: Regulations governing the operation and management of mutual funds in India.
Official Gazette PDF Record
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CIRCULAR
SEBI/HO/IMD/IMD-PoD-1/P/CIR/149 November 04, 2024
To
All Mutual Funds
All Asset Management Companies (AMCs)
All Trustee Companies/ Boards of Trustees of Mutual Funds
Association of Mutual Funds in India (AMFI)
All Custodians
Dear Sir/Madam,
Subject: Investments in Overseas Mutual Funds/ Unit Trusts by Indian Mutual
Funds
1. Mutual Funds are permitted to invest in overseas securities as specified under
paragraph 12.19.2 of the SEBI Master Circular no. SEBI/HO/IMD/IMD-PoD-
1/P/CIR/2024/90 dated June 27, 2024 (hereinafter referred to as ‘Master Circular’),
which also includes investment in overseas Mutual Funds/Unit Trusts (‘MF/UTs’).
2. In order to facilitate ease of investment in overseas MF/UTs, to bring transparency
in the manner of investment, and to enable Mutual Funds to diversify their overseas
investments, the following has been decided based on feedback received from the
industry, consultation with Mutual Fund Advisory Committee and public
consultation:
Investment by schemes:
2.1. In terms of paragraph 12.19.2.10 of the Master Circular, 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% of their assets.
Page 1 of 42.2. While investing in overseas MF/UTs that have exposure to Indian securities, the
Indian Mutual Fund schemes shall ensure the following:
2.2.1. Pooling: Contribution of all investors of the overseas MF/UT is pooled into a
single investment vehicle, with no side-vehicles including segregated
portfolios, sub-funds or protected calls, etc.
2.2.2. Pari-passu and Pro-rata: Corpus of the overseas MF/UT is a blind pool (i.e.
common portfolio) with no segregated portfolios. 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.
2.2.3. Independent investment manager/fund manager: Overseas MF/UT is
managed by an independent investment manager/fund manager who is
actively involved in making all investment decisions for the fund. This ensures
that the investments are made autonomously by the investment
manager/fund manager without influence, directly or indirectly, from any of
the investors or from any other entity.
2.2.4. Public disclosure: Such overseas MF/UTs disclose their portfolios at least
on a quarterly intervals to the public to maintain transparency.
2.2.5. No advisory agreement: There shall not be any advisory agreements
between Indian Mutual Funds and underlying overseas MF/UTs, to prevent
conflict of interest and avoid any undue advantage to either of the parties.
Breach of the limit:
2.3. At the time of making investments (both fresh and subsequent), Indian Mutual
Fund schemes shall ensure that the underlying overseas MF/UTs do not have
more than 25% exposure to Indian securities.
2.4. Subsequent to the investment, if the exposure by an underlying overseas
MF/UTs to Indian securities exceeds 25% of their net assets, an observance
period of 6 months from the date of publicly available information of such breach
(e.g. portfolio disclosures) shall be permitted to Indian Mutual Fund schemes for
Page 2 of 4monitoring of any portfolio rebalancing activity by the underlying overseas
MF/UT.
2.5. During the observance period, the Indian Mutual Fund scheme:
2.5.1. shall not undertake any fresh investment in such overseas MF/UT.
2.5.2. may resume their investments in such overseas MF/UT in case the exposure
to Indian securities by such overseas MF/UT falls below the limit of 25%.
Rebalancing of the portfolio:
2.6. If the portfolio of an underlying overseas MF/UT is not rebalanced within the 6-
month observance period, Indian Mutual Fund scheme shall liquidate its
investments in the concerned underlying overseas MF/UT within the next 6
months (‘liquidation period’) from end of the observance period.
2.7. If the exposure to Indian securities by the underlying overseas MF/UT falls below
the prescribed limit of 25% during the liquidation period, the requirement at
clause 2.6 above shall not be applicable.
Non-compliance:
2.8. If the Indian Mutual Fund/ Asset Management Company fails to rebalance the
portfolio of the scheme in line with the aforesaid requirements, then after the 6-
month liquidation period, the Indian Mutual Fund/ Asset Management Company
shall:
2.8.1. not be permitted to accept any fresh subscriptions in concerned Indian Mutual
Fund scheme;
2.8.2. not be permitted to launch any new scheme;
2.8.3. not levy exit load, if any, on the investors exiting such scheme(s).
Fundamental attribute change:
2.9. The Indian Mutual Fund scheme(s) shall be exempted from the requirement of
a fundamental attribute change for any change in underlying overseas MF/UT,
subject to the following:
2.9.1. The underlying overseas MF/UT exceeds 25% exposure to Indian securities,
and;
Page 3 of 42.9.2. The Indian Mutual Fund scheme intends to invest in other overseas MF/UT
with similar investment objectives, and;
2.9.3. A notice cum addendum is issued to investors.
3. The provisions of this circular shall come into force with effect from the date of this
circular.
4. The circular is issued in exercise of powers conferred under Section 11(1) of
Securities and Exchange Board of India Act, 1992, read with the provisions of
Regulation 43(1) & Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to
protect the interest of investors in securities and to promote the development of,
and to regulate the securities market.
5. This circular is available on SEBI website at http://www.sebi.gov.in under the
category “Legal -> Circulars”
Yours faithfully,
Peter Mardi
Deputy General Manager
Investment Management Department
Tel: 022 - 26449233
Email: peterm@sebi.gov.in
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