Capital market regulator Securities & Exchange Board of India (SEBI) has proposed to relax existing norms to address the challenges faced by the local mutual fund managers in managing offshore pooled assets.
It has proposed that requirements for appointment of separate fund manager, replication of portfolio and the criteria of 20 investors with no single investor holding more than 25 per cent in the fund may not be applicable to funds managed/advised with respect to two of the three categories of foreign portfolio investors (FPI).
Category I FPIs include government and government related entities such as sovereign funds and Category II FPIs include both broad based entities such as foreign mutual funds, investments trusts, etc. as also persons such as portfolio managers, investment managers, asset management companies, banks, etc.
The third category of FPIs who are likely to remain outside the purview of the relaxed norms include foreign investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
The existing regulation allows an Asset Management Company (AMC) to undertake business activity of management and advisory of offshore pooled assets/fund. For managing an offshore fund it is allowed to appoint the same fund manager who is managing domestic scheme, only if, the investment objective and asset allocation of domestic scheme and offshore fund are same and the portfolio is replicated (at least 70 per cent) in both the funds managed by that fund manager; otherwise, a separate fund manager is required to be appointed for managing/advising an offshore fund.
Further, norms mandate that such offshore fund has to be a broad based fund—i.e. the fund has at least 20 investors and no single investor accounts for more than 25 per cent of the corpus of the fund.
Earlier AMCs were allowed to undertake management and advisory activities for various verticals such as mutual funds, pooled assets including offshore funds, PMS, advisory services, etc.
However, in order to address the conflicts that were arising among these verticals, in 2011, AMCs, whose primary activity is to manage mutual funds, were mandated to restrict its other activities in two buckets: management of funds of other broad-based entities and other activities like PMS and advisory services, while meeting separate regulatory requirements for each of these buckets.
Currently, just a small proportion of Foreign Portfolio Investors (FPI) investment is being managed/advised by Indian mutual fund AMCs.
According to industry players, one of the problems have been the restrictive clauses including the need to have a separate fund manager as prospective FPIs prefer that the investment team or the fund manager who is managing domestic mutual fund scheme should manage/advise their capital too.
In addition, 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 instance, UCITS compliant funds have a restriction in terms of total cumulative exposure to the top 10 companies in the portfolio. This is not applicable to domestic mutual fund schemes and thereby acts as constraint in achieving replication of portfolio.
Local fund managers also say 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.
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 per cent 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 per cent in the pooled fund. Further, under FPI Regulations, broad based can also be achieved on a look-through basis.
SEBI has floated a draft note and has sought feedback on the proposal to relax the norms on or before February 2, 2015.
(Edited by Joby Puthuparampil Johnson)