The government plans to set up a new class of investor, Qualified Foreign Investors (QFIs), to encourage the flow of foreign capital into the mutual fund segment.
Under the proposed norms, overseas individual investors that are registered with depositories either in India or abroad can take the mutual fund route to invest in the Indian stock market.
"We are looking at two routes for allowing foreigners in MFs," a senior Finance Ministry official said. The issue of allowing foreigners into the MF segment also came up for discussion in the meeting of the sub-committee of the Financial Stability and Development Council (FSDC).
The government is exploring the idea of allowing QFIs registered with depository participants to invest in mutual funds directly and also through a mechanism -- Unit Confirmation Receipt (UCR) system -- he said.
Under the proposed UCR approach, a foreign investor can go to depositories in his home country and place orders on custodian banks in India. The custodian banks will look into the MFs and issue UCRs against the underlying MFs.
The proposal follows the Budget 2011-12 announcement with regard to allowing foreign individuals to invest directly in mutual funds.
Under the proposal, the fund houses will have to ensure know-your-customer (KYC) norms before seeking investment from overseas investors.
"To liberalise the portfolio investment route, it has been decided to permit SEBI-registered mutual funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes," Finance Minister Pranab Mukherjee said in his Budget speech.
The move would enable the sector to have direct access to foreign investors and widen the class of foreign investors in the Indian equity market.
"It would help increase foreign investment in stock market through the indirect route. Also the average assets of fund houses are likely to see some upswing," SMC Global Securities Strategist & Head of Research Jagannadham Thunuguntla 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.
