SEBI permits MFs to invest in overseas funds with Indian securities exposure

The markets regulator SEBI has authorised mutual funds (MFs) to invest in overseas mutual funds or unit trusts that allocate a portion of their assets to Indian securities. This investment is capped at 25% of the overseas fund’s net assets.

The initiative aims to simplify investment in foreign MFs/UTs, enhance transparency, and enable MFs to diversify their overseas investments, as stated in SEBI’s circular. The new framework is effective immediately.

MF schemes must consolidate all investors’ contributions to an overseas MF/UT into a single investment vehicle, avoiding side vehicles. The corpus of an overseas MF/UT should be a blind pool with no segregated portfolios, ensuring equal and proportionate rights for all investors.

“All investors in the overseas MF/UT have pari-passu and pro-rata rights, meaning they receive returns in proportion to their contributions,” SEBI explained.

Also read: SEBI proposes key changes for REITs and InvITs to enhance market flexibility, investor protection

Additionally, the regulator has prohibited advisory agreements between Indian MFs and the overseas MFs to prevent conflicts of interest.

According to SEBI, “Indian mutual fund schemes may invest in overseas MF/UTs with exposure to Indian securities, provided that total exposure does not exceed 25% of their assets.” Indian MF schemes must verify that the underlying overseas MF/UTs do not breach this limit at the time of both new and subsequent investments.

If the exposure exceeds the threshold after investment, an observance period of six months will be granted for monitoring portfolio rebalancing by the overseas fund. During this period, the Indian MF scheme cannot make new investments in the overseas MF/UT and may only resume if the exposure falls below 25%.

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