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MFs Unplugged

SEBI recently came out with the guidelines to facilitate mutual funds to invest abroad. But as per the guidelines, many fund houses will be out of contention to invest in ETFs abroad

The Securities and Exchange Board of India (Sebi) recently came out with the guidelines to facilitate mutual funds to invest abroad. The guidelines are keeping in line with the Union Finance Ministry's proposal in this year's Budget to hike the overall limit for the mutual funds to invest abroad from $1 billion to $2 billion. Finance Minister P Chidambaram had also proposed to allow qualified mutual funds to invest cumulatively up to $1 billion in overseas exchange traded funds.

As per the circular, mutual funds can invest in American Depositary Receipts (ADRs)/Global Depositary Receipts (GDRs) issued by Indian companies, equity of overseas companies listed on recognised stock exchanges overseas and rated debt securities within an overall limit of $2 billion.

There is also a sub-ceiling for individual mutual fund houses. According to this, a fund house will be able to invest only up to 10 per cent of its net assets as on March 31 of each relevant year, or $100 million, whichever is lower. Earlier, this limit was $50 million per fund house.

Additionally, of the $ 2-billion limit, mutual funds can also invest up to $1 billion in overseas exchange traded funds. The sub-limit of 10 per cent of the net assets as on March 31 of the relevant year, subject to a maximum of $50 million per mutual fund, is also applicable here.

However, mutual funds will have to meet the following two conditions to be eligible to invest in ETFs abroad. Firstly, they should be in existence for at least 10 years as on December 31, 2006, and secondly, they should have a certificate from trustees saying that the fund house has the experience of investing in foreign securities. The same will be required to be disclosed in the offer documents.

Further, a fund house will have to appoint a dedicated fund manager to invest in foreign securities. The existing schemes, which already invest in foreign securities, will have to comply with this clause in six months from the date of allotment.

Fund houses like Prudential ICICI, Franklin Templeton, Birla Sun Life, SBI, DSP Merrill Lynch are in a position to exploit this opportunity to the maximum, as they would meet all the regulatory requirements. Moreover, they have enough assets to utilize the $100 million (about Rs 450 crore) limit to the fullest without hitting the 10 per cent cap.

Some other fund houses, such as Reliance and Tata, might have to work a bit more to get the trustees' approval as regards experience to invest in foreign securities. Such fund houses may scout for a sub-advisor who has the requisite experience, should they decide to invest in foreign ETFs.

Many others like ABN Amro, Deutsche, HSBC and Fidelity will be out of contention simply because they have been in existence for less than ten years. Interestingly, even UTI and HDFC Mutual Fund are ineligible. While the former was spun-off from the erstwhile UTI in 2003, the latter was incorporated in 2000. Therefore, technically they do not meet the condition of being in existence for at least 10 years.

However, the schemes that they acquired after coming into existence are more than ten years old. It would be interesting to see whether the regulator will allow them to invest in exchange traded funds abroad or not, should they plan such a product.