SEBI Permits Mutual Funds To Invest In Offshore Funds With Indian Securities

SEBI explained that the new guidelines aim to ease the investment process in overseas MFs and unit trusts, enhance transparency, and promote greater diversification for MFs seeking overseas exposure

The Securities and Exchange Board of India (SEBI) on Monday announced that it has granted mutual funds the authority to invest in overseas mutual funds and unit trusts, with a condition that such foreign funds must limit their exposure to Indian securities to no more than 25 per cent of their net assets.

In a new circular, SEBI explained that the updated guidelines aim to ease the investment process in overseas mutual funds and unit trusts, enhance transparency, and promote greater diversification for mutual funds seeking overseas exposure. The changes take effect immediately.

Under the new framework, mutual fund schemes investing in overseas mutual funds or unit trusts must consolidate all investor contributions into a single investment vehicle, avoiding the creation of any side vehicles. SEBI also emphasized that the corpus of such overseas mutual funds or unit trusts must be a “blind pool,” ensuring that all investors have equal and proportional rights without segregated portfolios.

“All investors in the overseas mutual funds or unit trusts will enjoy pari-passu and pro-rata rights, meaning they receive returns proportionate to their contributions,” SEBI clarified, ensuring fair and equal treatment for all investors.

To avoid potential conflicts of interest, SEBI has also prohibited advisory agreements between Indian mutual funds and the underlying overseas funds.

The circular specifies that Indian mutual funds may invest in overseas mutual funds or unit trusts with some exposure to Indian securities, but this exposure must remain within the 25 per cent cap. At the time of both initial and subsequent investments, mutual fund schemes must verify that the overseas fund's exposure to Indian securities does not exceed this limit.

If the exposure to Indian securities crosses the threshold after the investment, SEBI allows a six-month observance period to monitor the overseas fund's portfolio rebalancing. During this period, Indian mutual funds are barred from making additional investments in the overseas fund. Investments can resume if the exposure returns below the 25 per cent limit within the observance period.