Investment in ADRs/GDRs/Foreign Securities and overseas ETFs by Mutual Funds
Summary
This circular raises the aggregate ceiling for mutual fund investments in foreign securities from US $1 billion to US $2 billion. It introduces specific eligibility criteria and limits for investing in overseas exchange-traded funds (ETFs). The document mandates dedicated fund managers, enhanced due diligence, and strict disclosure requirements for such international investments.
Text
The aggregate ceiling for the mutual fund industry to invest in ADRs/GDRs issued by Indian companies, equity of overseas companies listed on recognized stock exchanges overseas and rated debt securities has been raised from US $ 1 billion to US $ 2 billion in the Finance Bill 2006 – 07.
The mutual funds can make investments in i. ADRs/GDRs issued by Indian companies ii. equity of overseas companies listed on recognized stock exchanges overseas iii. foreign debt securities in the countries with fully convertible currencies... iv. government securities where the countries are AAA rated. v. units/securities issued by overseas mutual funds or unit trusts...
The mutual funds can invest in ADRs/GDRs/Foreign Securities within overall limit of US$2 bn. with a sub-ceiling for individual mutual funds which should not exceed 10% of the net assets managed by them as on March 31 of each relevant year, subject to a maximum of US $100 mn. per mutual fund.
Finance Bill for the year 2006-2007 permits a limited number of qualified Indian mutual funds to invest, cumulatively up to $ 1 billion, in overseas exchange traded funds.
To be eligible to invest in overseas ETFs, either of the two conditions shall be satisfied: i. The Mutual Fund shall be in existence for a minimum period of 10 years as on July 31, 2006 and managing schemes. ii. The Mutual Fund or its Sponsors shall have experience... of investing in foreign securities...
The mutual funds can invest in overseas ETFs within overall limit of US$ 1 bn. with a sub-ceiling for individual mutual fund which should not exceed 10% of the net assets managed by them as on March 31 of each relevant year, subject to a maximum of US $50 mn. per mutual fund.
The Mutual Fund shall appoint a dedicated Fund Manager for making investments in ADRs/GDRs/Foreign Securities and overseas ETFs. However, the existing schemes which have already invested in ADRs/GDRs/Foreign Securities shall ensure compliance with the said requirement within a period of six months from the date of this circular.
Boards of Asset Management Companies (AMCs) and trustees shall exercise due diligence in making investment decisions as required under Regulation 25 (2). They shall make a detailed analysis of risks and returns of investment in foreign securities and overseas ETFs... Investment must be made in liquid actively traded securities.
Intention to invest in foreign securities/ ETFs shall be disclosed in the offer documents of the schemes. The attendant risk factors and returns ensuing from such investments shall be explained clearly in offer documents. The mutual funds shall also disclose as to how such investments will help in the furtherance of the investment objectives of the schemes.
The mutual funds shall disclose the name of the dedicated Fund Manager for making investments in ADRs/GDRs/Foreign Securities and Overseas ETFs.
The mutual funds shall disclose exposure limits i.e. the percentage of assets of the scheme they would invest in foreign securities/ ETFs.
Such investments shall be disclosed while disclosing half-yearly portfolios in the prescribed format by making a separate heading "Foreign Securities/overseas ETFs." Scheme-wise percentage of investments made in such securities shall be disclosed while publishing half-yearly results in the prescribed format, as a footnote.
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Source: SecMarx — Investment in ADRs/GDRs/Foreign Securities and overseas ETFs by Mutual Funds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.