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Overseas investment by mutual funds

On May 8 2007, the Reserve Bank of India (RBI) increased the ceiling on investments by mutual funds registered with the Securities and Exchange Board of India (SEBI). The ceiling went up from $3 billion $4 billion.

In a circular dated September 26 2007 the RBI further increased the ceiling for overseas investment by mutual funds. The purpose of this is to provide enhanced prospects for overseas investments by mutual funds registered with SEBI. Such funds are now permitted to invest overseas subject to a cap of $5 billion, compared with the earlier cap of $4 billion.

SEBI registered mutual funds are permitted to invest in American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) of Indian and foreign companies. They can invest in rated debt instruments that are not below the accredited/registered credit rating agencies' investment grade. They can invest in the equity of overseas companies listed on recognised stock exchanges overseas, and in overseas mutual funds which have nominal investments in unlisted overseas securities. They may also invest in overseas exchange-traded funds involved in securities.

To enable mutual funds to access a larger investment stock overseas, the RBI now allows them to invest in the following, subject to guidelines issued by SEBI: money-market instruments rated above the investment grade; derivatives traded on recognised stock exchanges overseas for hedging and portfolio balancing; initial and follow-on public offerings for listing on recognised stock-exchanges overseas; short-term deposits with banks overseas, where the issuer is rated above investment grade; government securities where the countries are rated above investment grade; units or securities issued by overseas mutual funds or unit trusts registered with overseas regulators that have funds in real estate investment trusts listed on recognised stock exchanges overseas. Lastly, they can invest in foreign debt securities in countries which have fully convertible currencies; these countries must also have short- and long-term debt instruments with a rating not below the accredited/registered credit rating agencies' investment grade.

Shardul Thacker

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