New Delhi: India allowed qualified foreign investors (QFIs) to invest up to $13 billion (Rs 58,760 crore) in mutual funds (MFs) to deepen markets, reduce volatility and boost infrastructure spending.
The move is in line with pledges made earlier in the year by finance minister Pranab Mukherjee. Of the amount allowed, $10 billion is for equity-based funds and the rest for debt funds in the infrastructure sector, the government said on Tuesday.
QFIs include retail investors, insurance firms and trust funds.
However, they don’t include foreign institutional investors (FIIs) and sub-accounts, which are separately allowed to invest in MFs. Total assets under management of all MFs in India stood at Rs 7.28 trillion as of July end, with equity funds comprising 23%, data from the Association of Mutual Funds in India showed.
Slowdown concerns have been exacerbated by recent global uncertainties and have had an impact on the Indian markets. FIIs have been net sellers of Indian stocks in August although investments into the country since January are still net positive.
The finance ministry had said in June that QFIs would be allowed to invest $10 billion in equity-based MFs starting 1 August, in accordance with the announcement by Mukherjee in his 2011-12 budget speech.
“To liberalize the portfolio investment route, it has been decided to permit Sebi (Securities and Exchange Board of India)-registered mutual funds to accept subscriptions from foreign investors who meet the KYC (know your customer) requirements for equity schemes,” Mukherjee had said in his budget speech. “This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in the Indian equity market.”
The move may act as a further boost to MFs, which have been buoyed by Sebi last week allowing them to charge transaction fees from customers and easing the pressure they had come under after the regulator scrapped entry loads in 2009.
The $3 billion for debt MFs in the infrastructure sector was allowed after a demand by industry leaders during their interaction with the finance minister on 1 August, said Thomas Mathew, joint secretary in the finance ministry.
Mathew said that G.M. Rao of GMR Group, G.V.K. Reddy of GVK group, Anil Ambani of Reliance Group and Shashi Ruia of Essar Group had raised the issue with Mukherjee.
QFIs are investors with a long-term perspective and they now have the freedom to choose the MF that suits them best, he said.
The Reserve Bank of India (RBI) had initially been reluctant to allow investments in debt funds as these add to the country’s external debt, another official in the finance ministry said on condition of anonymity.
India’s external debt, at March end, stood at $305.9 billion, or 17.3% of the gross domestic product.
The $3 billion investment allowed in infrastructure-based debt MFs with a minimum residual maturity period of five years will be permitted within the existing ceiling of $25 billion for FII investment in corporate bonds issued by infrastructure companies.
The government’s move will attract money from foreign high networth individuals to Indian debt funds, said Jayesh Mehta, managing director and country treasurer (global markets group) at Bank of America NA.
MFs will, however, have to market themselves outside the country to attract such investors.
“I hope within six months’ time, the $3 billion ceiling could be reached,” Mehta said.
The funds have to file daily reports with Sebi on subscriptions and redemptions by QFIs. This information will be provided on the capital market regulator’s website.
“MFs can accept subscriptions from QFIs till such time the investments by QFIs under both the routes reaches $8 billion in equity schemes and $2.5 billion in debt schemes, and the remaining limit of $2 billion in equity schemes and $0.5 billion in debt schemes shall be auctioned by Sebi through bidding process,” Sebi said in a statement.
Sebi also said QFIs can buy units of equity or debt funds in the primary market, but cannot trade in the secondary market.
QFIs can hold units in a demat account through a depository participant or via unit confirmation receipts that will require domestic MFs to open foreign currency accounts.
Remya Nair and Reuters contributed to this story.