Indian mutual funds get access to a new source of funds


On August 9, 2011, SEBI issued a circular CIR/IMD/DF/14/2011 regarding investment by foreign investors in Indian mutual fund schemes. This was in response to the Hon’ble Finance Minister’s announcement in his budget speech of 2011 which stated that “Currently, only FIIs and sub-accounts registered with the SEBI, and NRIs are allowed to invest in mutual fund schemes. To liberalize the portfolio investment route, it has been decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market.”


In consultation with the Government and RBI, SEBI has decided that foreign investors – termed as Qualified Foreign Investors (QFIs) who meet know-your-client (KYC) requirements may invest in equity and debt schemes of mutual funds (MF) through the following two routes:

  • Direct route – Holding MF units in demat account through a SEBI registered depository participant (DP).
  • Indirect route – Holding MF units via Unit Confirmation Receipt (UCR).


The investment through the two routes shall be subject to the following conditions:

  • Qualified Foreign Investor (QFI) shall mean a person resident in a country that is compliant with Financial Action Task Force (FATF) standards and that is a signatory to International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding;
  • QFI shall not be resident in India;
  • QFI should not be registered with SEBI as Foreign Institutional Investor or Sub-account.

Furthermore, there is a cap on the aggregate investment by QFIs under both the routes; the cap being USD 10 billion for equity schemes. The cap for debt schemes which invest in infrastructure of minimum residual maturity of 5 years shall be USD 3 billion within the existing ceiling of USD 25 billion for FII investment in corporate bonds issued by infrastructure companies. The guidelines further talks of an auction by SEBI through bidding process of the remaining limit of QFI investment once the investments by QFIs under both the routes reaches USD 8 billion in equity schemes and USD 2.5 billion in debt schemes.


However, it needs to be noted that:

  • Units held by QFIs by way of UCR/demat holding will be non-transferable and non-tradable.
  • All subscriptions and redemptions in respect of investments by the QFIs will be from only overseas bank accounts of the QFIs.
  • Under this scheme of arrangements, systematic investments / transfers / withdrawals and switches are not available to the QFIs. QFIs can only subscribe or redeem.
  • Units/ UCRs held by QFIs should be free from all encumbrances, i.e., pledge or lien cannot be created for such units.
  • Applicable tax at source will be deducted by the MF out of the redemption proceeds before making any redemption payment to QFIs.


Though some of the above conditions seem onerous, it is likely that some foreign investors take this route to invest in India. Indian mutual funds need to be prepared in more than one ways to access this new source of funds. They need to enhance their distribution capabilities overseas. Additionally, many foreign investors are likely to demand that Indian mutual funds exert their rights as shareholders in investee companies. Indian mutual funds need to demonstrate that they genuinely care about better corporate governance at investee companies by participating actively in shareholder meetings and being more activist.