SEBI permits Indian MFs to invest overseas with 25% cap on Indian securities exposure

The Securities and Exchange Board of India (SEBI) has authorised Indian mutual fund schemes to invest in overseas mutual funds (MFs) or unit trusts (UTs), as long as the latter’s exposure to Indian securities does not exceed 25% of the overseas fund's total assets.

“At the time of making investments (both fresh and subsequent), Indian Mutual Fund schemes shall ensure that the underlying overseas MF/UTs do not have more than 25% exposure to Indian securities,” SEBI says in a latest circular.

The market regulator’s new regulation aims to simplify investments in overseas mutual funds, enhance transparency, and enable mutual funds to diversify their foreign portfolios. Effective immediately, this framework is designed to streamline overseas investments and provide greater clarity for investors.

“The following has been decided based on feedback received from the industry, consultation with the Mutual Fund Advisory Committee and public consultation,” SEBI adds.

SEBI has mandated that these entities must remain within the specified exposure limit at both the time of any fresh and subsequent additional investments.

If this threshold is exceeded after investment, the scheme is given a six-month observance period to monitor for rebalancing by the overseas fund. During this time, no new investments in the overseas fund are allowed, though investments may resume if exposure falls back below 25%.

If the overseas fund fails to rebalance within this observance period, the Indian mutual fund has an additional six months to liquidate its holdings. Further, the SEBI mandates that the fund cease accepting new subscriptions, suspend the launch of new schemes, and waive any exit load fees for investors exiting the scheme.

Under the new guidelines, overseas MF/UTs must be managed by an independent fund manager who makes all investment decisions autonomously, free from investor or third-party influence. These overseas mutual funds or unit trusts must also publicly disclose their portfolios at least quarterly to ensure transparency.

Additionally, SEBI mandates that all investors’ contributions to an overseas MF/UT be pooled into a single investment vehicle, eliminating side vehicles like segregated portfolios or sub-funds. This setup ensures a “blind pool” structure, where investors have equal (pari-passu) and proportional (pro-rata) rights to returns based on their contributions.

To further mitigate conflicts, SEBI has prohibited advisory agreements between Indian mutual funds and the overseas MF/UTs they invest in, reinforcing an unbiased and uniform investment approach.