SEBI directive to mutual funds on overseas stocks stirs debate on investment limit

Sebi's directive to mutual fund schemes with investments in ETFs listed on foreign exchanges comes as the Mutual Fund industry reaches close to the investment limit of $1 billion set by the regulator for this category, says Chirag Mehta, CIO, Quantum AMC.

This is reminiscent of the time when the industry had reached the $7 billion foreign investment limit and had to suspend flows in funds investing in stocks overseas. 

These limits probably were put in place to limit outflows of foreign currency within a limit to reduce the impact on balance of payments and thereby on the Indian currency, Mehta said.

“The result will be that these mutual fund schemes will have to limit their inflows. It's been a long time since these limits were set and are probably due for enhancement,” he said.

The Association of Mutual Funds India (AMFI) received a directive from the Securities and Exchange Board of India (SEBI) instructing a cessation of new investments in ETFs allocating funds to overseas markets, as per Angel One. 

This action comes in response to the nearing breach of the upper limit for ETFs set by the Reserve Bank of India (RBI) for overseas investments, currently standing at $1 billion out of a total industry-wide limit of $7 billion.

Effective from April 1, 2024, fund of funds (FoFs) investing in exchange-traded funds (ETFs) listed on international markets will be required to halt the acceptance of new investments. 

This move follows the regulatory framework aimed at maintaining adherence to RBI's prescribed limits on foreign investments by mutual funds, as per Angel One.