FEMA norms may raise investment bar on foreign-owned mutual funds

Funds will have to adhere to sectoral caps and restrictions applicable to foreign investment in Indian equities

A clutch of mutual fund (MF) houses — those that are either foreign-owned or controlled — may find themselves in a bind, following a tweak in the Foreign Exchange Management Act (FEMA) regulations a few days ago.

The Government of India notified new rules with regard to foreign investment in non-debt instruments on October 17, classifying MFs that invest more than 50 per cent in equity as ‘investment vehicles’. 

Until then, only real estate investment trusts, infrastructure investment trusts, and alternative investment funds were considered investment vehicles. Downstream investment by such funds by way of subscription or acquisition of shares