SEBI proposes to facilitate domestic MFs to invest in overseas funds

News Excerpt: 

Market regulator Securities and Exchange Board of India (SEBI) proposed to allow investment by domestic mutual funds in overseas funds that have a limited exposure to Indian securities.

More about News: 

  • Currently, SEBI-registered mutual funds are allowed to invest in overseas securities, including ADRs/GDRs  issued by Indian or foreign companies, equity of overseas companies listed on recognized stock exchanges, IPOs/FPOs for overseas listings, and government securities of investment-grade-rated countries.
  • SEBI is proposing to allow domestic mutual funds to invest in overseas mutual funds/unit trusts (mutual funds/Unit Trust) that have exposure to Indian securities, subject to a limit of 20% of the overseas MF/UT's net assets.
  • The regulator said with the strong economic growth prospects of India, domestic securities offer attractive investment opportunities for foreign funds. Various international indices, exchange-traded funds (ETFs), and mutual funds allocate a portion of their assets to Indian securities. 
    • For instance, as of April 30, 2024, the MSCI Emerging Markets Index (MEMI) had an 18.08% weightage to Indian securities.

Key Benefits from this decision: 

  • Diversification: This proposal allows domestic mutual funds to diversify their portfolios further by gaining exposure to overseas funds that invest in Indian securities. Diversification can help mitigate risks and potentially improve overall portfolio performance.
  • Access to Growth Opportunities: Investing in overseas funds with exposure to Indian securities provides domestic mutual funds with access to the growth potential of the Indian economy. India's strong economic prospects make it an attractive destination for foreign investment, and participating in these opportunities can benefit domestic investors.
  • Risk Management: The proposal includes a limit of 20% exposure to Indian securities for overseas funds, which helps manage the risk of over-concentration in a single market. Additionally, the six-month observance period allows domestic mutual funds to monitor and adjust their investments if the exposure exceeds the limit.
  • Market Efficiency: Increased participation of domestic mutual funds in overseas funds can contribute to the efficiency of both domestic and international markets. It can enhance liquidity, price discovery, and market transparency, benefiting investors and market participants.
  • Transparency and Governance: SEBI's requirement for overseas funds to be managed by an officially appointed, independent investment manager/fund manager ensures transparency and adherence to governance standards. Periodic disclosure of portfolios to the public maintains transparency and helps investors make informed decisions.
  • Alignment with Global Trends: The proposal aligns with global investment trends where investors seek exposure to emerging markets like India. By facilitating investments in overseas funds with Indian exposure, SEBI enables domestic mutual funds to align with international investment strategies and market dynamics.

ADR:

  • American Depositary Receipts (ADRs) are shares issued in the U.S. by foreign companies through a depositary bank intermediary. 
  • Available only in the U.S ADRs can be traded on exchanges like the NYSE, Nasdaq, and over-the-counter (OTC). 
  • Foreign companies and their depositary banks must comply with U.S. securities laws and exchange rules.
  • ADRs offer American investors a way to diversify their portfolios with international investments, simplifying the process by trading on U.S. exchanges. 
  • However, they come with unique risks, such as currency conversion risks for dividend payments. While ADRs are denominated in U.S. dollars, their initial valuation is based on the foreign company's home currency.

GDR:

  • A Global Depositary Receipt (GDR) is a type of depositary receipt that can be offered in multiple foreign countries. Unlike those limited to a single market, such as
    •  American Depositary Receipts (ADRs) or European Depositary Receipts (EDRs), 
    • GDRs are issued through a program enabling a company to offer its shares in various international markets. 
  • For example, a Chinese company might issue GDRs in both the London and U.S. markets via a depositary bank intermediary. Each issuance must comply with the laws of the home country and each foreign market.

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