The Indian mutual fund industry, reeling under strict regulatory norms related to commissions and disclosures, has finally got a reason to smile. Finance Minister Pranab Mukherjee, while presenting the Union Budget 2011-12, has allowed fund houses to tap foreign nationals for investing in equity schemes.
It is widely believed that the move would lead to a lot of mid-sized foreign funds and wealthy individuals looking at the Indian equity market more seriously. According to the current norms, foreign investors need to first register with the Securities and Exchange Board of India (Sebi) before investing in the domestic equity markets. As a result, mid-sized and smaller funds which did not have a significant India allocation chose alternative investment avenues, including offshore funds and participatory notes (PNs). Going forward, they just need to comply with the KYC norms and start investing.
Experts feel the government’s initiative could prove to be a “game-changer” for the Indian fund industry, as this would pave the way for large global investors to invest directly into mutual fund schemes.
| MUTUAL BENEFIT |
| Measure |
| * MFs to accept subscriptions from foreign investors who meet 'Know Your Customer' norms for equity schemes |
| Impact |
| * Likely to boost inflows into domestic equity schemes |
| * Equity MFs may get inflows from global pension funds, endowment schemes and family offices |
| * Foreign-sponsored fund houses, or where they are majority partners, will be major beneficiaries |
“It is a big game-changer for the Indian mutual fund industry,” says Arindam Ghosh, chief executive officer at Mirae Asset Global Investments (India). “This move will open up a huge window for the domestic equity schemes to attract investments from foreign investors like pension funds, endowment schemes and family offices,” he added.
In a similar context, Aditya Agarwal, country head of Morningstar India, a mutual fund tracking firm, says this move “will allow all kinds of foreign investors to invest in domestic equity schemes”. However, there is still uncertainty regarding tax implications on investment through this route, he adds.
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The domestic fund industry, however, will have to wait for some time as the detailed regulatory framework, including tax implications, will have to be first announced by Sebi. In August last year, a committee headed by current Sebi Chairman U K Sinha had proposed liberalising regulations for foreign investors.
A section of experts feel the decision, once implemented, will give fund houses owned by foreign entities an advantage over their domestic counterparts. Even those wherein the majority stake is held by a foreign entity might find the going comparatively easy.
Global players like Franklin Templeton, Fidelity, DWS Investments, HSBC, JPMorgan, Morgan Stanley, Principal, Mirae Asset, ING and Pramerica run their own mutual fund houses in India. Others like Blackrock, Robeco, Sun Life and Prudential have joint ventures with Indian companies.
“This means that foreign individual investors can now invest in Indian equity funds. These investors were earlier coming through offshore India-focused funds and those looking for a direct exposure might consider this route,” says Harshendu Bindal, president, Franklin Templeton Investments (India).
Higher FII cap on infra bonds to help in long term
The government’s decision to increase the limit of foreign institutional investments in infrastructure bonds and flexibility in trading will bring positive changes, but only in the long term. It will not attract large flows in the short term, according to bond market dealers.
The increase in the limit and permission to foreign institutional investors (FIIs) to trade in infra bonds amongst themselves even during a lock-in period conveys the government’s serious intent to attract overseas funds into the infrastructure sector. But more needs to be done to improve liquidity in the secondary bond market, said G A Tadas, managing director of IDBI Gilts Ltd, a public sector bond dealer.
FII investments in infrastructure bonds remain well below the present ceiling. The secondary market for corporate bonds to provide liquidity remains nascent.
Finance Minister Pranab Mukherjee, while presenting the Budget for 2011-12, raised the limit on investments in corporate bonds issued by companies in the infrastructure sector by $20 billion to $25 billion. FIIs can invest in bonds with residual maturity of over five years issued by companies in infrastructure sector.
The increase in ceiling will raise the total limit available to the FIIs for investment in corporate bonds to $40 billion.