What changed
Previously, mutual funds could only invest in ADRs/GDRs of Indian companies, rated debt instruments, and equity of listed overseas companies. Now, they can also invest in overseas mutual funds that hold up to 10% in unlisted securities, overseas exchange-traded funds (ETFs), and ADRs/GDRs of foreign companies. The monthly reporting requirement to RBI continues but with a modified format to capture these new categories.
What it means for you
This liberalisation gives Indian mutual funds access to a broader range of overseas securities, potentially improving portfolio diversification and returns. For banks acting as authorised dealers, it means facilitating these new investment types for their mutual fund clients and ensuring accurate monthly reporting in the revised format. Banks should update their internal systems and client advisories to reflect the expanded investment options.
What you must do
- Update internal procedures to process mutual fund investments in overseas MFs (with ≤10% unlisted), ETFs, and foreign company ADRs/GDRs.
- Communicate the new investment categories to mutual fund clients and advise on compliance with SEBI and FEMA regulations.
- Revise monthly reporting templates to include the three new categories as per the annexed format and submit to RBI on time.
- Ensure all transactions under this circular are recorded with proper documentation and without prejudice to other regulatory approvals.
Who it affects
Category-I Authorised Dealer Banks, SEBI-registered Mutual Funds, Mutual fund trustees and asset management companies, RBI's Foreign Exchange Department
What are the three new categories of overseas investments now allowed for mutual funds?
Mutual funds can now invest in (i) overseas mutual funds that have nominal investments (up to 10% of NAV) in unlisted overseas securities, (ii) overseas exchange-traded funds (ETFs) that invest in securities, and (iii) ADRs/GDRs of foreign companies.
Do the monthly reporting requirements to RBI change?
Yes, the monthly reporting continues but the format is revised to include the three new categories: overseas mutual funds, ETFs, and foreign company ADRs/GDRs. Banks must use the annexed format for submissions.
Which regulations govern this circular?
This circular is issued under Sections 10(4) and 11(1) of FEMA, 1999, and amends the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. Separate amendments to those regulations will follow.