Govt may allow foreign individuals to invest $10 bn in MFs

India is likely to allow foreign individuals to invest in mutual funds in the next two weeks but with a cumulative cap of $10 billion, an official said today.

The detailed guidelines are being worked out jointly by the Finance Ministry, RBI and Sebi.

These will be notified by the capital market regulator, the Finance Ministry official said.

The move follows announcement in the last Budget by Finance Minister Pranab Mukherjee.

It was aimed at broad-basing the flow of foreign investment in the Indian stock market, so that dependence on FIIs' funds, considered as hot money, is reduced.

"This will increase corpus in MF holdings, which means MFs will purchase more equity and other schemes as a result of which it will help in fighting volatility, which takes place due to FII outflows," a Finance Ministry official told PTI.

At present, only FIIs and sub-accounts registered with the market regulator Sebi and NRIs are allowed to invest in mutual fund schemes in the country.

"Discussions between government, RBI and Sebi are in final stages and market regulator's guidelines in this regard are expected in two-three weeks," the official said.

The proposed move would not only help in attracting more foreign funds but is also expected to bring in 'more depth' in the fast-growing domestic mutual funds industry.

Earlier Mukherjee in his Budget speech had said: "To liberalise the portfolio investment route, it has been decided to permit Sebi-registered mutual funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes".

The official said there is a "broad consensus" that investments by foreign individuals should be limited up to $10 billion.

For allowing foreigners in the segments, the government is looking to introduce a completely new class of investors, called Qualified Foreign Investors (QFIs).

QFIs registered with depository participants can invest in the mutual funds directly and also through a mechanism, Unit Confirmation Receipt (UCR) system, sources said.

Under the proposed UCR approach, a foreign investor can go to depositories in his home country and place orders on custodian banks in India. The custodian banks will look into the MFs and issue UCRs against the underlying MFs.

The fund houses, however, will have to comply with know-your-customer (KYC) norms before seeking investment from overseas investors.

The average assets managed by the MF industry, consisting of 40 players, stood at Rs 7,00,538 crore as of March 31, 2011.