Govt permits foreign investors to invest up to $13 bn in MFs

The government today allowed foreign investors to invest up to $ 13 billion in equity and debt schemes of mutual funds, a move aimed at enhancing depth in the capital market.

The announcement comes at a time when there are concerns over the flight of foreign capital and is expected to provide much needed succour to the markets.

"It has been decided that the aggregate investments by Qualified Foreign Investors (QFIs) in equity schemes of the mutual funds under direct and indirect routes shall be subject to a ceiling of $ 10 billion," a finance ministry statement said.

Similarly, QFIs can invest up to an additional amount of $ 3 billion in the units of mutual fund scheme, which invest in infrastructure debt of minimal residual maturity of five years in corporate bonds issued by infrastructure companies, it said.

QFI is an individual, group or association, resident in a foreign country that is compliant with the Financial Action Task Force ( FATF) standard.

It is to be noted that QFIs do not include foreign institutional investors or sub-accounts as these are already permitted to invest in equity and debt markets in India.

This would enable QFIs to have direct access to the Indian mutual funds. It would widen the class of investors participating in the Indian capital market, help increase depth and reduce volatility in the market, it said.

Both Reserve Bank and Securities and Exchange Board of India (Sebi) issued enabling notifications in this regard.

Dividend payments on units held by QFIs would have to be directly remitted to the overseas accounts of the QFIs by the domestic mutual funds and dividend payments to QFIs would not be allowed as an eligible credit to the single rupee pool bank account, RBI said in its notification.

Sebi in a separate notification said QFIs can buy units of equity or debt funds in the primary market, but cannot trade in the secondary market.

The capital market regulator also said that when the cumulative QFI investment reaches $ 8 billion in equity schemes, SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice.

A similar process will be followed when the investment in debt hits $ 2.5 billion.

The QFI limit for debt will be within the overall ceiling of $ 25 billion, including FIIs, set by the RBI in corporate debt issued by infrastructure companies.

According to the statement, the announcement incorporates the suggestion made by captains of India Inc during meeting with Finance Minister Pranab Mukherjee on August 1 to allow investment from QFIs up to $ 3 billion in for debt schemes in the infrastructure sector.

As the scheme has now been expanded to include debt schemes investing in infrastructure sector, it is expected to give a new momentum to the debt instruments in this priority sector, it said.

The QFI scheme, it said, will make it easier for the overseas investors to participate in the infrastructure sector projects in India, and therefore would provide an additional source of overseas long term debt funding.

The move follows the announcement of Finance Minister Pranab Mukherjee on the issue in the last Budget.

"Currently, only FIIs and the sub-account registered with the Sebi and NRIs are allowed to invest in the mutual fund schemes.

To liberalise the portfolio investment route it has been decided to permit Sebi registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes," Mukherjee had said in the Budget speech.

"This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in India equity market," the Finance Minister had said.

The average assets managed by the MF industry, consisting of 40 players, stood at Rs 7.28 lakh crore as of July, 2011.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/govt-permits-foreign-investors-to-invest-up-to-13-bn-in-mfs/articleshow/9542322.cms