SEBI Directs AMFI to Halt Inflows into Overseas Schemes of Mutual Funds from April 1
In a significant move, the Securities and Exchange Board of India (SEBI) has issued a directive to the Association of Mutual Funds in India (AMFI), instructing it to halt any new inflows into overseas exchange-traded funds (ETFs) starting from April 1. This decision comes as the investments are nearing the cumulative limit of $1 billion set by the Reserve Bank of India (RBI).
In an effort to manage external investments carefully, SEBI initially paused new subscriptions to mutual fund schemes dedicated to investing in stocks outside of India in January 2022. This step was taken due to concerns over the aggregate cap of $7 billion for the mutual fund industry’s overseas investments. As international markets experienced a downturn, the regulator moved to manage the total investments strictly within this limit.
Mutual funds in India have two primary channels for investing abroad: direct investments in foreign markets and through subscriptions to overseas ETFs managed by international fund houses. Presently, India boasts 77 mutual fund schemes with investments in foreign markets.
The decision to limit overseas investments has prompted AMFI and numerous mutual fund houses to appeal to the RBI and SEBI, advocating for an increase in the investment limits. They argue that higher limits would provide investors better opportunities to diversify their portfolios and leverage potential returns from developed markets.
Despite these appeals, the current cap on overseas investments, established back in 2007-08 when India’s foreign exchange reserves were approximately $300 billion, remains unchanged. This is despite significant growth in the Indian economy and an increase in foreign exchange reserves to $600 billion, as pointed out by a leading fund house’s CEO.
Additionally, SEBI has instructed mutual funds to assess their utilization of the overseas investment quota based on the initial cost of acquisition, rather than the current market valuation of the investments. This guidance comes as mutual funds have previously accepted investments in overseas schemes depending on the available capacity within each fund house’s specific limit.
Recently, Nippon India Mutual Fund, a dominant player in the overseas-focused mutual fund sector, halted new subscriptions to four of its international schemes. These include the US Equity Opportunities, Japan Equity, Taiwan Equity, and Nippon India ETF Hang Seng BeES. However, the fund house assured that existing systematic investment plans (SIPs) and systematic transfer plans (STPs) in these schemes would proceed unaffected.
Amidst this environment of uncertainty regarding new investments, the flow of funds into overseas mutual funds has remained relatively unchanged throughout the fiscal year. In fact, there was a noticeable increase in net outflows from funds of funds investing abroad, rising to ₹239 crore in February from ₹115 crore in April. Despite this, the overall assets under management for these funds saw a 10% growth over 11 months of this fiscal year, reaching ₹24,932 crore up from ₹22,639 crore the previous April.
The directive issued by SEBI marks a critical point in regulating the mutual fund industry’s exposure to international markets, aiming to maintain a balanced approach to overseas investments. As such, it reflects the regulator’s ongoing commitment to safeguard investor interests while managing the flow of foreign investments effectively.
