SEBI Proposes to Allow Mutual Funds to Invest in Overseas Funds with Exposure to Indian Markets

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing to allow Indian mutual funds to invest in overseas funds that have a limited exposure to Indian securities. This initiative aims to facilitate diversification and provide new investment opportunities for Indian mutual funds.

Currently, SEBI regulations permit Indian mutual funds to invest in specified eligible overseas securities, such as equities of overseas companies listed on recognized stock exchanges and foreign debt securities in countries with fully convertible currencies. However, the existing framework does not explicitly allow investments in overseas mutual funds (MFs) that have exposure to Indian securities, leading many Indian mutual funds to avoid such investments.

Given India’s strong economic growth prospects, Indian securities are increasingly attractive to foreign funds. International indices and funds, such as the MSCI Emerging Markets Index and JP Morgan’s ‘Emerging Markets Opportunities Fund,’ allocate significant portions of their assets to Indian securities. As of April 30, 2024, the MSCI Emerging Markets Index had an 18.08% weightage to Indian securities, while JP Morgan’s fund held approximately 15% in Indian investments.

To address the ambiguity and encourage diversification, SEBI suggests permitting Indian mutual funds to invest in overseas funds that have up to 20% exposure to Indian securities. This limit aims to balance the benefits of international diversification with the need to prevent excessive exposure to Indian markets.

SEBI believes that this proposal, with appropriate safeguards, will keep Indian fund of funds (FoFs) schemes true to their label while allowing investors to gain desired exposure to overseas securities.

The objective of this consultation paper is to seek public comments on the proposed framework. Stakeholders and the public are invited to submit their feedback to SEBI by June 7, 2024.

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