New investor category to encourage fund flow to MFs

The government plans to set up a new class of investors, qualified foreign investors (QFIs), to encourage the flow of foreign capital into mutual funds.

Under the proposed norms, foreign individual investors registered with depositories either in India or abroad can invest in mutual funds in India. “We are looking at two routes for allowing foreigners in mutual funds,” said a senior finance ministry official. The issue of allowing foreigners into the mutual funds segment was also discussed at a meeting of a sub-committee of the Financial Stability and Development Council (FSDC).

The government is considering allowing QFIs registered with depository participants to invest in mutual funds directly. Investments in mutual funds could also be made through a mechanism — the unit confirmation receipt (UCR) system. Under the proposed UCR system, a foreign investor can approach depositories in his native country and place orders on custodian banks in India. The custodian banks would look into the mutual funds and issue UCRs against the underlying mutual funds. The proposal follows the Budget 2011-12 announcement of allowing foreign individuals to invest directly in mutual funds.

Under the proposal, fund houses would have to ensure know-your-customer (KYC) norms before seeking investment from foreign investors. “To liberalise the portfolio investment route, it has been decided to permit mutual funds registered with the Securities and Exchange Board of India to accept subscriptions from foreign investors who meet the KYC norms for equity schemes,” Finance Minister Pranab Mukherjee had said in his Budget speech.

The move would enable the mutual funds sector to have direct access to foreign investors and widen the class of foreign investors in the Indian equity market. “It would help increase foreign investment in the stock market through the indirect route. Also, the average assets of fund houses are likely to see some upswing,” said SMC Global Securities Strategist and head (research), Jagannadham Thunuguntla.