SEBI restricts overseas investment by mutual funds; Why?


The Securities and Exchange Board of India (SEBI) has imposed restrictions on new lump-sum investments in mutual funds focused on investing in foreign equities. The restriction becomes applicable after February 2, 2022.

Funds that focus solely on foreign equities would no longer be able to accept lump-sum investments. Meanwhile, funds that have the choice to deploy capital between Indian and foreign stocks may decide to allocate a higher amount to Indian stocks.

But some funds have preferred to limit new investments, so as not to significantly change the proportion of investments.

Why were these restrictions put in place?

According to regulations, there are limits to the funds that can be invested externally through mutual funds. The limits imposed by SEBI include an industry-wide cap of $7 billion and a limit of $1 billion per mutual fund house.

With Indian investors wanting to increase their exposure to countries such as the United States and take advantage of the technology boom, the total investment has reached the limit of foreign investment.

As a result, the association of mutual funds in India has asked mutual funds to close the funds to new investors. Exchange-traded funds have a separate industry-wide cap of $1 billion, while the limit for each WTF was $200 million.

The Reserve Bank of India has implemented capital controls to prevent an outflow of capital from India. There are restrictions on Indian companies, individuals, mutual funds and other entities, based on the amounts they can invest outside India.

In the past, these rules were quite strict, such as reducing overseas remittances from $200,000 to $75,000 and implementing partial capital controls in 2013.

However, over the years, these rules have been relaxed and limits have been raised on capital outflows. But, unlike inward capital movements, the rules relating to outward capital movements remain restrictive.

Previously, foreigners were restricted from investing in several asset classes and industries. These restrictions have been relaxed, allowing a freer inflow of capital into several segments of the Indian markets.

Previously, SEBI increased the individual mutual fund house limit from $300 million to $600 million in November 2020. Then the limit was increased to $1 billion per mutual fund house, in June 2021, subject to the aggregate limit of $7 billion. Foreign investment limits for ETFs used to be $50 million, but were later raised to $200 million.

Until RBI increases these limits by more than $7 billion or the assets under management of these funds decrease, it is likely that the caps will remain in place. A significant depreciation in the value of the rupee could also contribute to the removal of the ceiling. However, the industry expects these caps to be temporary measures and expects the limits to be raised further.

How will mutual funds invest overseas?

For now, the funds will stop accepting lump sum deposits, while allowing existing SIPs to continue for now. Several funds and ETFS have had their investment plans suspended after SEBI asked them to slow down their overseas investments.

For example, DSP Global Innovation Fund-of-Funds suspended its plan to invest in certain foreign funds. In addition, the Motilal Oswal Mutual Fund has stopped accepting new lump sum investments for three of its international schemes.

Can you still invest abroad?

Although mutual funds expect investment limits to be raised, given the strong demand from Indian investors, those who want to invest immediately also have other options.

ETFs that focus on overseas markets are still trading on Indian stock markets, but are likely to trade at a premium as new investments have been banned.

Another option for investors would be to invest directly in stocks, rather than investing through an intermediary. Under the liberalized remittance program, an individual can send $250,000 overseas. Thus, a family of three can send about $750,000 abroad for investment purposes.

However, investing directly in stocks would require experience and hard work in researching US stocks. Moreover, an investor then has to bear high brokerage fees, transaction costs, documentation and several other hassles that could be avoided through mutual fund investments.


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