Foreign funds in a bind over Sebi's curbs on overseas investments by MFs

The Securities and Exchange Board of India’s (Sebi's) restrictions on overseas investments by mutual funds (MFs) have put the brakes on international offerings. Sources said asset management companies in the process of filing scheme documents for at least a dozen international schemes are awaiting clarity from the Reserve Bank of India (RBI) and Sebi.

Last month, the markets regulator had advised a halt on subscription in schemes intending to invest in overseas securities with immediate effect to avoid breach of industry-wide limits of $7 billion for investment in overseas securities.

However, investments in overseas exchange-traded funds (ETFs) continue as the $1-billion limit is yet to be fully harnessed. Currently, MFs can make investments in overseas ETFs, subject to a maximum of $300 million per MF, within the overall industry limit of $1 billion.

“We were going to file at least five to six international offerings, but the markets regulator has informed us to wait for the RBI to increase the ceiling. The industry is open to launching international ETFs, but cannot come out with other funds at this point in time,” said a senior executive from a leading fund house.    

After the Sebi diktat, international funds had stopped taking fresh inflows into their schemes. Executives in the industry are confident that the RBI will soon increase the ceiling limit and funds will once again be open to subscription.

In June 2021, Sebi had increased the limit from $600 million to $1 billion per MF, within the overall industry limit of $7 billion.

“Given the popularity of international funds in India, we feel the RBI should increase the limit to $12-15 billion. It’s been a month and if some decision is not taken by the regulators, investors might not find it desirable to invest in this international category,” said another executive.

In the past two years, the demand for international funds has seen a spurt. These offer investors an opportunity to participate in leading international companies. Even the diversification significantly reduces country-specific risk and lowers portfolio volatility.

In 2021, around 22 international funds were launched by different fund houses as they were gaining popularity. In the same calendar year, international funds on average delivered returns of 11.74 per cent, reveals the data from Value Research.