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Debate stirred by SEBI directive to mutual funds on overseas stock investment limit

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SEBI directive to mutual funds on overseas stocks stirs debate on investment limit

The Securities and Exchange Board of India (SEBI) has directed mutual fund schemes with investments in ETFs listed on foreign exchanges to cease new investments. Chirag Mehta, CIO of Quantum AMC, mentioned that this action is due to the industry nearing the $1 billion investment limit set by the regulator for this category. Mehta also highlighted the historical context when similar restrictions were imposed to manage outflows of foreign currency and its impact on the Indian currency.

According to Angel One, the directive from SEBI was received by the Association of Mutual Funds India (AMFI), instructing a stop to new investments in ETFs allocating funds to overseas markets. This response is to prevent breaching the upper limit for ETFs set by the Reserve Bank of India (RBI) for overseas investments, which currently stands at $1 billion out of a total industry-wide limit of $7 billion.

Effective from April 1, 2024, fund of funds (FoFs) investing in exchange-traded funds (ETFs) listed on international markets will be required to halt the acceptance of new investments. This move aligns with the regulatory framework aimed at ensuring compliance with RBI’s prescribed limits on foreign investments by mutual funds. The industry stakeholders are anticipating possible enhancements to these limits that have been long overdue, as mentioned by Chirag Mehta.

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The development indicates a proactive approach by regulatory authorities to manage foreign investments in mutual funds and maintain financial stability within the country. With the upcoming changes, mutual fund schemes investing in ETFs listed on foreign exchanges will have to adjust their operations to comply with the new restrictions in place from April 2024.

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