The regulator may relax rules related to appointment of separate fund manager, replication of portfolio and the minimum requirement of having 20 investors for managing offshore funds.
Keeping
in view the challenges faced by the fund managers in managing offshore pooled
assets, market regulator SEBI may relax the restriction of appointing a separate
fund manager, the requirement to replicate portfolio and the criteria of minimum
20 investors (with no single investor holding more than 25 percent).
In
a consultative paper released by SEBI today, it has said that the above
restrictions may not be applicable to funds managed / advised by local fund
managers of AMCs in regard to (i) Category I FPIs which includes government and
government related entities and (ii) broad based Category II FPIs, as Category
II includes both broad based entities such as mutual funds, investments trusts,
etc. and persons such as portfolio managers, investment managers, asset
management companies, banks, etc.
The
regulator has sought feedback from public by February 02.
This
issue was recently discussed in Mutual Fund Advisory Committee (MFAC) in its
meeting held on December 22, 2014. “The committee opined that the extant restrictions
on managing /advising of offshore pooled assets/funds by AMCs were introduced
during the period when the definition of foreign investors were not as precise as
it is defined currently. The introduction of FPI Regulations is seen as a significant
step towards simplifying access to Indian capital markets and has also
streamlined categories of foreign investors. Thus, as the Category I FPIs and
Category II FPIs are distinct, well defined and are regulated in their
respective local jurisdictions, the requirements as laid out in regulation 24(b)
i.e. appointment of separate fund manager, replication of portfolio and the criteria
of 20 investors with no single investor holding more than 25% may not be
applicable to offshore pooled assets / funds managed/advised by team of local AMCs
in regard to both these categories of FPIs,” states SEBI’s consultative paper.
Following was the proposal from AMCs
to SEBI:
The
feedback from the market suggests significant increase in interests of global
investors towards Indian capital markets and specifically in equity markets.
Currently, a small proportion of Foreign Portfolio Investors (FPI) investment
is being managed / advised by Indian AMCs. Considering the long term track
record of Indian mutual funds and a well-developed regulatory regime, there is
a significant potential for the global capital being invested in India to be
managed / advised by local mutual fund managers. The prospective FPIs also
prefer that the investment team or the fund manager who is managing domestic mutual
fund scheme should manage / advise their capital too.
Fund
managers face the following challenges and constraints in managing / advising
offshore pooled assets/ funds:
a) Regulatory
requirements of the jurisdictions governing offshore funds have some constraints
which may not be applicable to domestic mutual fund schemes or vice versa. For
e.g. UCITS compliant funds have a restriction in terms of total cumulative
exposure to the top ten companies in the portfolio. This is not applicable to
domestic mutual fund schemes and thereby acts as constraint in achieving
replication of portfolio. The stock level restrictions applicable to FPIs investing
in India may be another hindrance in achieving replication.
b) Replication
of portfolio also becomes difficult to achieve as the investment objective,
investment strategy and the benchmark for each of the funds, including offshore
funds, managed by local fund managers, are different. For instance majority of
offshore funds follow MSCI India Index as their benchmark while none of the
local funds follow MSCI India Index. The composition of MSCI India Index is
different as compared to local benchmarks such as NIFTY, SENSEX, CNX 500, BSE
100 or BSE 200.
c) The regulation does not allow for transactions in opposite directions i.e. buy and sell between the two funds viz. domestic fund and an offshore fund. The inflow /outflow pattern of the two funds can be substantially different and may be in opposite directions. This may be seen as a limiting factor.
d) Further, restriction that domestic mutual fund managers can only manage offshore pooled assets / funds which satisfy the criteria of broad base, i.e.at least 20 investors with no single investor holding more than 25 percent of corpus of the fund, makes FPIs ineligible as under SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations), broad base means at least 20 investors with no single investor holding more than 49 percent in the pooled fund. Further, under FPI Regulations, broad based can also be achieved on a look through basis.
