The finance ministry has exempted mutual funds from being categorized as foreign investors, a status that would have subjected them to foreign direct investment (FDI) sectoral caps and various Foreign Exchange Management Act (Fema) rules. A finance ministry notification in this regard came in December 2019.

A 17 October ministry circular had classed mutual funds with more than 50% foreign shareholding as foreign investors, ignoring the fact that mutual funds are investment vehicles for unit holders, including retail investors. The ministry has now excluded mutual funds from the category, reverting them to their original status.

The circular had defined mutual funds with more than 50% foreign shareholding as investment vehicles, a change which would have forced several equity asset managers to freeze investment activity and even sell their holdings.

Ironically, retail domestic money invested in the schemes of foreign-owned mutual funds would have been counted as foreign money. For instance, if a company is allowed 74% foreign shareholding under FDI rules, any investment in it by an Indian mutual fund with more than 50% foreign shareholding would have been considered part of the 74% cap.

The ministry via a gazette notification in the first week of December amended and removed the requirement, exempting mutual funds from the circular. The foreign funds will now be required to make additional disclosures on their investment activity.

The clarity brings much-needed relief for fund houses such as HDFC Mutual Fund, ICICI Prudential Asset Management Co. Ltd and Mirae Asset Mutual Fund, which could have been directly impacted by the move as all of them have over 50% foreign ownership.

A fund manager at a foreign-owned AMC, who declined to be named, said that mutual funds are not treated as foreign entities under Fema.

This has been clarified in a recent notification in the Official Gazette. “We were complying with all the additional disclosures for foreign entities even before the previous Fema notification came. However, some AMCs were not doing this. The fresh notification is a relief for them," he added.

The clarity from the finance ministry follows representations from the Securities and Exchange Board of India (Sebi) and fund managers.

Mint had reported on 10 November that Sebi had send representations to the finance ministry that as per the Sebi Act, under all rules and regulations, mutual funds are exempted from all money pooling or investment vehicle provisions.

So, the ministry’s view that foreign majority-owned funds are investment or pooling vehicles is in direct contradiction.

Following the representations, the finance ministry had kept the circular in abeyance till clarifications were issued.

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