Offshore MF products hit regulatory hurdle

Sebi yet to give nod as it fears these may be used for round-tripping

Mutual funds’ (MFs) proposed offshore products are facing clearance hurdles, with capital market regulator Securities and Exchange Board of India (Sebi) yet to approve these schemes. Sebi’s discomfort with these schemes, which would invest a portion of their corpus in India, is that this may lead to round-tripping — a practice in which money leaves the country and is brought back as foreign capital, which will then be eligible for tax-breaks available to overseas investors.

“Sebi is uncomfortable because investing in these funds will lead to money moving out of the country and then coming back into India as part of the broader fund allocation,” said a senior official with a mutual fund, which has filed with Sebi to launch the product.



Five MF houses have applied to Sebi to launch these funds since January this year, while two funds had sought regulatory nod as early as in 2011. In 2012, one fund had asked for approval. SBI, Axis, Franklin Templeton, HSBC, JP Morgan and Religare Invesco have filed offer documents for offshore products with an Asia or emerging market focus. While Franklin Templeton and SBI filed for one product each in 2011, HSBC filed for its offshore fund in 2012. Axis MF, Franklin Templeton, Religare Invesco and JP Morgan filed offer documents for global or emerging market offshore feeder funds this year.

Feeder funds are those domiciled outside India and investing in foreign MFs that invest across geographies.

Industry officials are confident of receiving regulatory nod for these funds soon. They say that Sebi is looking at granting approval for these funds after having made certain changes to the allocation mandates of these funds. One of the conditions put in place by the regulator was to limit allocations into India to 15 per cent of the total investment corpus of the fund.

“Besides, the regulator is also asking for larger disclosures regarding investments into these funds as well as the quality of the underlying and other risks associated with these funds,” said Ashvin Parekh, senior expert and advisor (financial services) at EY.

Fund house officials said the allocation to India in an emerging market fund would anyway not exceed six or seven per cent of the total corpus, while in a global equity fund the allocation to India would be even lower. The MSCI Emerging Market Index’s allocation to India is less than seven per cent.

Wealth managers said that investors would not look at offshore MFs as a route for tax evasion through round-tripping because it was not tax-efficient.

“The moment the investment money goes out of India, the tax mandate changes. Tax treatment given to investments into offshore equity feeder funds is the same as that of a debt fund, for which returns earned are taxed at 10-20 per cent,” said Raghavendra Nath, managing director of Ladderup Corporate Advisory. “So, these products are, by no means, tax-efficient.”

Some in the industry believe that round-tripping cannot be prevented, even within the 15 per cent allocation mandate. Others, however, say the offshore feeder fund route is too small a window for investors to indulge in round-tripping, especially by promoters of companies as the investment mandate is controlled by managers of the international fund.