Panel for tax sop to MF plans abroad

As the step towards opening the global markets to domestic MFs, the committee has suggested that funds permitted by SEBI to invest abroad be provided a one time approval by the RBI under the Exchange Control Regulations to support the overseas investment activities. Thecommittee has recommended that the approval provided by RBI should cover areas including dollar-rupee conversion, disinvestment and repatriation.

The overall ceiling of investment will be $ 500 million and a limit of $ 50 million for an individual MF. The fund-wise investment ceilings should be monitored by the trustees of the fund who will report to SEBI at periodic intervals. The aggregate investment limits for all mutual funds will be monitored by SEBI based on periodic reports, the committee suggested.

The schemes investing can be both open-ended and close-ended and the MFs who wish to invest abroad will have to file an offer document with SEBI. The committee has said that MFs will have to take permission from the union government and RBI to invest in ADRs/GDRs issued abroad by Indian companies.

The panel said MFs will not be permitted to borrow or leverage and use of derivatives must be restricted to hedging exposure and efficient portfolio management and not speculation. The committee has saidthat MFs should not enter into short sale of securities or hold short positions on derivatives.

With regard to forex exposure hedging, MFs will be allowed to enter into hedging contracts, effect delivery under such contracts, renew, cancel, prematurely deliver, extend and make amendments to the contracts. MFs will be allowed forward covers and currency future hedging to the extent of the total value of the assets of the fund.

The committee has said that SEBI must also ensure that full disclosures are made to the unit holders of an existing scheme if it plans to invest a portion of its assets in overseas markets. MFs will not be permitted to underwrite securities of other issuers.

It said overseas investments by MFs should be exempt from the purview of RBI guidelines for joint ventures abroad. MFs will be allowed to nominate a designated bank branch through which it proposes to conduct forex transactions including inward and outward remittances. MFs will not be allowed to invest in securities not listedor traded on any exchange or over the counter basis, unless they are through primary or secondary offerings on the completion of which the securities will be listed.

MFs will be allowed a period of six months from the date of permission obtained by SEBI to completely exhaust the permitted limit for overseas investment, and on expiry would be required to approach SEBI for extension. If the MF does not seek extension, then it would be assumed that the MF has allowed the unutilized time limit to lapse. The committee also realised that mutual funds need to have more expertise in the field of operations, hence it was recommended that mutual funds be allowed to appoint one or more offshore investment advisor, sub-advisors or sub investment managers to manage the overseas investment on a discretionary basis.

Further irrespective of whether a mutual fund appoints an offshore advisor for any of its schemes which chooses to invest in overseas markets, the responsibility and obligations arising out of suchinvestments would continue to vest with the asset management company of the mutual fund. Mutual funds desirous of investing predominantly in overseas markets out of existing schemes (predominance being defined as at least 90 per cent of the assets of existing scheme), should disclose the fees/expense structure applicable to the extent of overseas investment.