SEBI has cleared the decks for Indian mutual funds to invest overseas. The market regulator has announced that mutual funds will be allowed to invest upto 10 per cent of their net assets in foreign equities, as on January 31, 2003. However, a minimum investment of $5 million (Rs 23.5 crore) has also been specified. On the higher side, the maximum a fund can invest is $50 million (Rs 235 crore).
Due to the minimum investment criteria specified by SEBI, only funds whose 10 per cent of net assets is Rs 23.5 crore or above will be eligible to invest overseas. By this criterion, of the 112 equity funds in the country (excluding hybrid funds), only seven will be eligible to invest in foreign equities. The government had earlier specified that mutual funds could only invest in stocks of listed overseas companies that hold at least 10 per cent in a company listed in India, and the new guidelines are in addition to that.
Finally, another area that needs to be looked at is returns. Apart from the performance of foreign stock markets, the exchange rate between the rupee and the foreign currency would also be a key factor. In fact, due to the rupee appreciation against the dollar since May 2002, many income funds have postponed the launch of overseas income funds. A strong rupee vis-à-vis the dollar means that the fund earns less when it converts dollar earnings into rupees.
In the past, when the ADR/GDR investment route was opened to mutual funds, few fund houses such as Pioneer ITI (now part of Franklin Templeton India), Prudential ICICI and Morgan Stanley had actively participated here. Now that the guidelines are in place let's see which fund is the first to own Fortune-500 names such as Unilever or Hewlett-Packard.