10.8.11

Mutual funds update

The opening up of Indian mutual fund sector for overseas retail investors or qualified foreign investors (QFI), regulations for which were announced on Tuesday, will bring in new pool of capital into the Indian equity markets, given the $10 billion cap set for equity schemes alone.
Industry officials termed this as a significant move in opening up India's financial sector and will attract “big money“ into the country's capital market.
The rules put out by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) in two separate notifications have also put a $3 billion cap for QFIs investments in debt schemes.
Mutual fund industry has been struggling to attract new investments post the 2008 global meltdown and the ban on entry load in 2009. The regulator also set two other conditions: 1) that that when cumulative QFI investments reach $8 billion in equity schemes, Sebi will auction the remaining $2 billion to foreign investors who can then buy units of schemes of their choice, and, 2) a similar process will be followed when investments in debt touch $2.5 billion.
The QFI limit for debt will be within the overall ceiling of $25 billion, including that of FIIs, set by the Reserve bank of India (RBI) in corporate debt issued by infrastructure companies.
All mutual funds in India together hold assets worth Rs 7,28,000 crore (as in July). There are about 240 mutual fund schemes and QFIs can invest in any number of the schemes.
The joint secretary in the finance ministry in charge of capital markets, Thomas Mathew, told media that mutual funds registered with Sebi would accept subscriptions to equity schemes from foreign investors who meet the KYC (know your customer) requirements.
The government will review the $10 billion and $3billion limits once the inflows approach the ceiling — as is done in the case of external commercial borrowings (ECB).
The move will help reduce volatility. Unlike FII inflows that flow in and flow out without notice, individual foreign investors stay in the market for medium to long term. Letting QFIs in will thus give depth to the market. In fact, the present situation had thrown up a “great and golden opportunity and India is geared to convert the crisis into opportunity.

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