Foreigners allowed to invest in mutual funds

Cap of $10 billion proposed; Sebi to notify final rules by August one.

In an endeavor to manage the volatile capital flows, the finance ministry these days allowed foreign people to take a position up to $10 billion in domestic mutual funds.

The Securities and Exchange Board of India (Sebi) can notify the principles by August one. The move was announced within the Budget.

At present, besides resident Indians, solely foreign institutional investors (FIIs), sub-accounts registered with Sebi and non-resident Indians will invest in mutual funds in India.

The move can offer mutual funds access to additional foreign cash. The fund trade, however, reacted with caution and said it'd watch for the ultimate tips.

FRAMEWORK OF THE DIRECT ROUTE FOR INVESTING 

* A foreign investor opens a demat account in India  

* Places an order to buy MF units directly on the depository participant (DP) 

* Remits money directly to DP, which is mandated to report to the custodian on a daily basis 

* MF deposits the units according to the investor’s instructions in the demat account 

* MF units can be sold and foreign exchange remitted by the MF to the DP 

FRAMEWORK OF UNIT CONFIRMATION RECEIPT (UCR) SYSTEM 

* A foreign investor goes to an overseas depository and hands over foreign currency 

* Places an order with the depository to buy units of Indian MFs 

* The depository receives cash and remits it to the custodian bank in India, which buys MF units according to the investor’s instructions 

* The depository issues UCRs against underlying units to foreign non-institutional investors 

* UCRs can be surrendered for cash with the depository

The move comes at a time the govt is finding it troublesome to fund its current account deficit owing to volatile capital flows and better imports. Foreign retail participation in mutual funds could address the balance of payments downside by bringing in additional stable funds and reducing the dependence on FII inflows, that are volatile.

The entry of foreign investors could add another Rs forty five,000 crore ($10 billion) to mutual funds’ assets below management of Rs seven,31,448 crore. Out of this, Rs 1,92,087 crore is invested in equity.

The investment limit might be increased if inflows were sensible and didn't fluctuate abundant, said officers.

“We are willing to review the limit once six months, if needed. it'll be a guard against volatility as retail investors keep invested for the future. So, it'll increase the depth of the market,” said Thomas Mathew, joint secretary, capital markets, finance ministry.

The new category of investors, referred to as qualified foreign investors (QFIs), are ready to invest through the depository participant (DP) route in addition because the unit confirmation receipt (UCR) system, which is able to involve custodians.

In the initial choice, a QFI can open a demat account with a depository in India and get units. within the second choice, an investor can place an order with a remote depository, which is able to then transfer it to a custodian bank in India for purchasing the units.

QFIs may be people and bodies, as well as pension funds. Fund homes are chargeable for deducting tax at supply.

The trade reacted with caution. Executives said the move might be a game changer however added they might got to initial see the ultimate tips to guage its impact.

Sundeep Sikka, chief govt officer, Reliance Mutual Fund, said, “It’s a step within the right direction and can contain volatility. it's not solely sensible for asset management firms however additionally for the capital markets.”

Arindam Ghosh, chief govt officer, Mirae Asset world Investment (India), said, “The government has kept an affordable limit. This has an explosive potential, however we tend to are watching for the ultimate tips.” He said the move would lower the volatility in fund flows. “The churn ratio in India is above the world figure. we've got to examine how stable funds from foreign individual investors are,” he said.

A section of fund managers said the choice to place a cap was premature. “It isn't attainable for domestic fund managers to sell product overseas given the regulatory hurdles in alternative countries,” said the chief investment officer of 1 of the highest 10 fund homes within the country.

“It won't provides a major boost to domestic fund homes. i think this route are utilized by Indians to bring black cash into the country,” said an trade veteran.

The chief govt of a mid-sized fund house said the trade was seemingly to examine lots of volatility in fund flows, resulting in underperformance of mutual funds. He added the choice may impact alternative investors too.

Source:http://www.business-standard.com/india/news/foreigners-allowed-to-invest-in-mutual-funds-/440734/