The Securities and Exchange Board of India (Sebi) has put its plans to allow Indian mutual funds (MFs) to be sold through ‘passporting’ on the back-burner. Passporting would have allowed domestic schemes to be sold in Asian countries without the need for regulatory clearance in the host country.
The regulator is worried about excessive inflows into MFs and fears that being part of such an agreement will bring in additional foreign money into Indian mutual fund schemes, making them more susceptible to sudden outflows, sources said.
Sector officials have also lobbied the regulator to put off passporting for the time being and let them focus on deepening their penetration in the country first.
Mutual funds have garnered record assets in the past year, with average monthly inflows of Rs 40-60 billion through systematic investment plans (SIPs). Total MF assets stood at over Rs 21 trillion as of March 31, 2018. In 2017-18, MFs pumped Rs1.4 trillion into Indian equities, more than six times the Rs 222 billion put in by foreign portfolio investors.
Sebi has been working with the International Organization of Securities Commissions (Iosco) and regulators in other Asian countries to make passporting a reality for over two years now. Last year, Sebi's International Advisory Board had specifically urged the regulator to look at new practices such as passporting.
“While Sebi has been participating in discussions centred around passporting, it is not keen on allowing this right now,” said a person familiar with the matter. An email sent to Sebi did not get a response.
India is not yet a member of Asia Region Funds Passport, a region-wide initiative led by Australia, New Zealand, South Korea and Singapore. If implemented, passporting will provide a multilaterally agreed framework to facilitate cross-border marketing of managed funds across participating economies in Asia.
Once part of it, Indian MF schemes could be sold elsewhere without the fund house having to register separately with the regulator of that country or setting up a subsidiary in the jurisdiction. Conversely, schemes of these countries will be allowed to be sold in India.
For example, an HDFC Top 200 scheme would be allowed to be sold in Singapore, and schemes from funds based in Singapore could be sold in India without the need for separate registration, and with minimal regulatory intervention.
Currently, Indian funds wanting to sell schemes abroad have to register in that country with the local regulator, a process which can take up to a year. Indian investors wanting to invest in international schemes at present do so through Indian feeder funds, which invest into their parent firms' funds abroad.
Experts said passporting will expand the market for Indian funds globally and allow Indian investors to choose from a wide bouquet of Asian funds. “Passporting is a superior and more regulated way of investing abroad and will offer a wider choice to Indian investors who can currently invest in stocks through international feeder funds or directly within the limit offered by the liberalised remittance scheme,” said Dhirendra Kumar, CEO, Value Research.
"Our regulatory standards are the best in the world and any fund or scheme sold in India would be allowed to be sold elsewhere as well," added a senior fund official.
Passporting of funds in Europe is made possible through the Undertakings for the Collective Investment of Transferable Securities (UCITS), a regulatory framework of the European Commission that creates a harmonised regime for the management and sale of MFs. UCITS funds can be registered in Europe and sold to investors worldwide, using unified regulatory and investor protection requirements. The fund providers which meet the standards are exempt from national regulation in individual European countries.