The government today said that foreign investors, other than FIIs, would be allowed to invest up to $10 billion in domestic mutual funds, a move that will help in moderating volatility in the capital market.
This class of investors called Qualified Foreign Investors (QFIs), but not Foreign Institutional Investors (FIIs), can invest money into domestic mutual funds through Unit Confirmation Receipts (DPs) or Depository Participant route, Joint Secretary (capital markets) in the Finance Ministry, Thomas Mathew, said.
QFIs could be individuals and bodies, including pension funds, and cumulatively they can invest up to $10 billion (about Rs 45,000 crore).
At present, only FIIs, sub-accounts registered with the market regulator Sebi and NRIs are allowed to invest in mutual fund schemes in the country.
To begin with, $10 billion is the total ceiling on QFI investment in India but it is subject to review depending on response, he said.
"Sebi will be the regulator for all investments for both routes," he said, adding the Sebi will issue necessary notification and framework by August 1.
Only KYC (know-your-customer) compliant retail foreign investors would be allowed to invest and the DPs will ensure proper KYC of QFIs as per the norms prescribed by Sebi, he said.
Besides, mutual funds would also undertake KYC of QFIs, he added.
He further said that one QFI can open one account in one of the qualified DPs and only QFIs from jurisdictions which are FATF (Financial Action Task Force) compliant would be eligible to invest in the MFs under the scheme.
The move follows the announcement of Finance Minister Pranab Mukherjee on the issue in the last Budget.
"Currently, only FIIs and the sub-account registered with the Sebi and NRIs are allowed to invest in the mutual fund schemes. To liberalise the portfolio investment route it has been decided to permit Sebi registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes," Mukherjee had said in the Budget speech.
"This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in India equity market," the Finance Minister had said.
The average assets managed by the MF industry, consisting of 40 players, stood at Rs 7,00,538 crore as of March 31, 2011.
Since it is going to be retail investment, it would be more stable than the FII money, Mathew said.