SEBI Restricts Overseas Investments By Mutual Funds; why?

Why Have Overseas Investments Been Restricted by SEBI?

by Sourav Datta - Tuesday, February 1, 2022 07:09 PM IST
Why Have Overseas Investments Been Restricted by SEBI?SEBI
  • According to SEBI regulations, there are limits on the funds that can be invested overseas 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.

The Securities and Exchange Board of India (SEBI) has put up restrictions on new lumpsum investments in mutual fund schemes that focus on investing in overseas stocks. The restriction becomes applicable after 2 February 2022.

Funds that are focused solely on foreign equities would not be able to accept any lumpsum investments anymore. Meanwhile funds that have the choice of deploying capital between Indian and foreign equities, can decide to allocate a higher amount to Indian equities.

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

Why Have These Restrictions Been Put Into Place?

According to regulations, there are limits on the funds that can be invested outside 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 interested increasing their exposure to countries such as the United States, and riding the technology boom, the total investments have reached the foreign investment limit.

As a result the association of Mutual Fund in India has asked mutual funds to close the funds to new investors. Exchange Traded Funds have a separate cap of $1 billion, for the entire industry, while the limit for each WTF stood at $200 million.

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

In the past, these rules had been quite tight, such as overseas remittances being reduced from $200,000 to $75,000 and implementing partial capital controls in 2013.

Nevertheless, over the years, these rules have been relaxed and limits have been raised for an outward flow of capital. But, in contrast to inward capital movement, outward capital movement rules still remain restrictive.

Earlier, foreigners were not allowed to invest in several asset classes and industries. These restrictions have been relaxed, allowing freer inflow of capital into several segments of Indian markets.

Previously, SEBI had increased the individual mutual fund house limit from $300 million to $600 million in November 2020. Then, the limit was raised to $1 billion per mutual fund house, in June 2021, subject to the overall limit of $7 billion. ETFs’ overseas investment limits stood at $50 million earlier, which was then raised to $200 million.

Until RBI increases these limits over $7 billion or assets under management for these funds go lower, it is likely that the caps would stay in place. A significant depreciation in the value of the Rupee could help with a removal of the cap as well. However, the industry expects such caps to be temporary measures, and expect the limits to be raised further.

How Will Mutual Funds Invest Abroad?

For now, funds will stop accepting lumpsum deposits, while allowing existing SIPs to continue for now. Several funds and ETFS have seen their investing plans put on hold after SEBI had asked them to go slower on investing abroad.

For instance, DSP Global Innovation Fund-of-Funds has puts its plan of investing in certain overseas funds on hold. Further, Motilal Oswal Mutual fund has stopped accepting new lumpsum investments for three of its international schemes.

Can You Still Invest Abroad?

Though mutual funds expect the investment limits to be raised, given the high demand from Indian investors, those who wish to invest immediately have other options available as well.

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

Another option for investors would be to invest into stocks directly, rather than investing through an intermediary. Under the liberalised remittance scheme, an individual can send $250,000 abroad. Hence a family of three can send around $750,000 abroad for investment purposes.

However, direct investment in stocks would require experience and hard-work in researching American stocks. In addition, an investor must then put up with high brokerage fees, transaction costs, documentation and several other hassles that could be sidestepped through mutual fund investments.

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