SEBI

SEBI’s restriction on Mutual Funds for overseas investments

The Securities and Exchange Board of India (SEBI) has directed the Mutual Funds (MFs) houses to stop making further investments in schemes investing in overseas stocks. SEBI’s restriction has forced the Association of Mutual Funds in India (AMFI) to ask the MF houses to stop accepting fresh payments which are investing in the overseas stocks. SEBI’s restriction shall be applicable from 2^nd February onwards.

Reason for SEBI’s Restriction 

SEBI has setup an upper limit of $1 billion for every Fund House and an upper limit of $7 billion for the MF industry as a whole. A separate limit has also been set at a maximum of $1 billion for the MF houses making investments in Exchange Traded Funds (ETFs) which are listed on the foreign exchanges.  

The reason for SEBI’s restriction has come because the upper limit set by the SEBI is going to be met very soon by MF houses and in order to prevent the MF houses from exceeding the prescribed limit of $7 billion, AMFI has asked the MF houses from receiving any fresh lumpsum investment by the investors to be invested in the overseas stocks.

In simple words, the MF houses cannot buy anymore overseas securities or units of schemes that are listed in foreign markets from 2^nd February, 2022 onwards. However, the SEBI’s restriction is not applicable on investment in ETFs. To further clarify, SEBI’s restriction temporarily stops investments made in the Indian based schemes that invest in the international securities of other mutual funds schemes that are listed abroad. The MFs that are investing in the Global ETFs will continue to receive funds from the investors. 

Whether SEBI’s restrictions are permanent in nature?

It must be remembered that SEBI’s restrictions on investment in the abovementioned scheme is not permanent in nature. It is only temporary restriction. The MF houses cannot collect from investors investment for fresh systematic investments plans or schemes that offer systematic transfer plans that are making investments in foreign stocks and or feeding into foreign MF schemes. They can, however, continue to make investments in the ETFs. The AMFI has asked the MF houses and other MF distribution platforms to make necessary changes for not accepting the investments.  

For the time being, the MF houses have been allowed to continue with their Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs), they will certainly hit the ceiling limit prescribed by the SEBI. However, the MF houses are not allowed to make any further investments in the overseas securities after 1^st February, 2022. Therefore, only those schemes that invest only in the overseas securities according to the asset allocation mentioned in the Scheme Information Document will be forced to stop taking investments from the investors in the form existing of SIPs and STPs.

There are MF schemes which make investments in both Indian stocks as well as overseas stocks. After the above mentioned SEBI’s restrictions, these schemes have to decide whether they want to make incremental investments in the Indian stocks. If the managers of these MF schemes are comfortable with the idea of making investments in Indian stocks and the Scheme Information Document permits the same, then these fund houses can continue to accept payments from the customers in the form of SIPs and STPs. Owing to the SEBI’s restrictions, one of the funds that have been investing in both Indian stocks and overseas stocks has stopped taking fresh lumpsum and registration of fresh SIPs and STPs. They have chosen this step to avoid diluting their scheme’s characteristic of maintaining 35% of schemes share in international equities and adding additional inflows will distort their scheme allocation. However, the scheme will continue with the existing SIPs and STPs.

The MF houses have that are getting affected by these SEBI’s restrictions have been asked to submit an addenda about them getting affected from the stoppage of receiving investments. 

Reactions and responses from the Fund houses

Another Big Fund house has stopped accepting lumpsum payments in three of its international schemes and also ceased to creating further units in the other ETF.

Another fund has decided to alter its investing strategy for the time being. The fund has been currently investing in a mix of four foreign MF units coupled with two ETFs. With the SEBI’s restrictions in place, it has decided to allocate the money in the two ETFs only and not invest in the existing four overseas MF units.

Options of switch out and redemption

The option to sell their investments is always available to the unit holders for the schemes that have stopped taking in fresh investments.

The unit holders can switch to other schemes as well. There are no restrictions on redeeming and switching out.

However, it must be noted, that every redemption and switching out is burdened with the exit load and other applicable taxes.

When will these MFs start accepting fresh statements?

The MF industry is waiting for the time when the existing ceiling limit imposed by the SEBI will be hiked. The Reserve Bank of India is expected to take a decision on the issue of industry wise investment limit in overseas investments. The experts are of the view that the existing SEBI’s restrictions shall be hiked in the coming times and same shall be notified by SEBI very soon. The announcement is expected to come a few days after the announcement of Budget.

SEBI has the history of announcing the increase of foreign investment limit. The limit was doubled in the year of 2020 for each fund house upto $600 million. In the year of 2021, the limit was hiked till $1 billion. Taking into account the above precedents, the industry experts believe that the current SEBI’s restrictions will soon be hiked.

Options available with the Investors

The investors have been left with two alternatives to choose from if they are still willing to make investments.

One of the alternatives is the investor can still make investments in the ETFs listed on the Indian Stock Exchanges^[1]. The investors’ however, must be aware while buying the units of ETFs because it is believed that there is a possibility of these units being offered at a premium to the investors over the net asset value of the assets. The premium may be added because new units are not being created till the restrictions imposed by the SEBI are raised.  The experts are of the view that the current SEBI’s restrictions are of a temporary nature and very soon the announcement of the hiking up of the ceiling limit will be announced by the regulator.

Second alternative available with the investor is to directly buy the overseas stocks. But, to avail this alternative, the investor must have a very sound knowledge about the respective stocks in which he would be investing. It must be noted that while buying overseas stocks directly, the decision to buy the stock must be of investor himself or his investment advisor only. These MF houses must not be guiding the investors in any way for making investments in the overseas stocks.

Last but not the least there is another alternative that is available with the investor which is to wait for the MFs to resume making investments when the regulator hikes up the ceiling limit for MFs to make investments in the overseas equities. Some experts have a view that though the option of directly purchasing the equities in the foreign market or buying simple products such as index ETF’s directly, but the procedure involved is fraught with operational and cost issues. Further, the cumbersome tax procedure also discourages the investors from adopting this direct route.

Conclusion

Recently, SEBI’s restrictions have been imposed on MF houses who are investing in the foreign equities through their MF schemes. The upper limit has been set at $1 billion USD for individual MF houses and schemes investing in ETFs and $7 billion dollar for the industry as a whole. However, according to experts, this is of a temporary nature and the investors can continue to invest through other routes such as directly investing, investing in ETFs or waiting for SEBI to hike the ceiling limit.

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