14:48:11CHIEF GENERAL MANAGER
MUTUAL FUNDS DEPARTMENT
MFD/CIR/ 17 / 419 /02
March 30, 2002
All Mutual Funds registered with SEBI Unit Trust of India Association of Mutual Funds in India (AMFI)
Re. : Guidelines for Investment in Foreign Securities by Mutual Funds
Please refer to SEBI Circular dated September 30, 1999 pertaining to investment by mutual funds in ADRs/GDRs issued by Indian Companies.
Hon’ble Finance Minister of India has made announcement in his recent budget speech that mutual funds will now be permitted to make investments in rated securities in countries with fully convertible currencies. Subsequently, RBI has also written to SEBI in this regard.
In the light of the above, the mutual funds can now make investments in foreign debt securities in the countries with fully convertible currencies, short term as well as long term debt instruments with highest rating (foreign currency credit rating) by accredited/registered credit rating agencies, say A-1/AAA by Standard & Poor, P-1/AAA by Moody’s, F1/AAA by Fitch IBCA, etc. They may also invest in government securities where the countries are AAA rated.
As there is upper limit of US 500 million dollars for the entire mutual funds industry for making investment in ADRs/GDRs and foreign securities, each mutual fund is permitted to invest up to 4% of their net assets as on 28.2.2002 subject to the maximum of US 50 million dollars. The investment in foreign securities may be made by existing mutual funds schemes or new schemes launched for this purpose. The mutual funds may also invest in the units/securities issued by overseas mutual funds or unit trusts which invest in the aforesaid securities or are rated as mentioned above and are registered with overseas regulators.
Apart from applicability of SEBI (Mutual Funds) Regulations, 1996 and guidelines issued from time to time, the mutual funds shall adhere to the following specific guidelines for making investments in foreign securities:
Boards of asset management companies (AMCs) and trustees shall exercise due diligence in making investment decisions as required under Regulation 25 (2). They shall make a detailed analysis of risks and returns of investment in foreign securities, comparing them with likely yields of the securities available in domestic markets and how these investments would be in the interest of investors. Investment must be made in liquid actively traded securities.
Boards of AMCs and trustees may prescribe detailed parameters for making such investments which may include identification of countries, country rating, country limits, etc. They shall satisfy themselves that the AMC has experienced key personnel, research facilities and infrastructure for making such investments. Other specialised agencies and service providers associated with such investments e.g. custodian, bank, advisors, etc should also have adequate expertise and infrastructure facilities. Their past track record of performance and regulatory compliance record, if they are registered with foreign regulators, may also be considered. Necessary agreements may be entered into with them as considered necessary.
All investment decisions shall be recorded in accordance with SEBI circular dated July 27, 2000.
The following disclosure requirements shall be mandatory for mutual fund schemes proposing to invest in foreign securities.
Intention to invest in foreign securities shall be disclosed in the offer documents of the schemes. The attendant risk factors and returns ensuing from such investments shall be explained clearly in offer documents. The mutual funds shall also disclose as to how such investments will help in the furtherance of the investment objectives of the schemes. Such disclosures shall be in a language comprehensible to an average investor in mutual funds.
The mutual funds shall disclose exposure limits i.e. the percentage of assets of the scheme they would invest in foreign securities.
Such investments shall be disclosed while disclosing half-yearly portfolios in the prescribed format by making a separate heading “Foreign Securities.” Scheme-wise percentage of investments made in such securities shall be disclosed while publishing half-yearly results in the prescribed format, as a footnote.
Investment by Existing Schemes:
Existing schemes of mutual funds may invest in foreign securities, consistent with the investment objectives of the schemes and where the offer documents provide for such investments and disclose attendant risk factors. Any additional disclosures as specified above shall be informed to unitholders by way of addendum. In case the offer document of an existing scheme does not provide for investment in foreign securities, the scheme, if it so desires, may make such investments in accordance with these guidelines, provided that:
It obtains approval from the trustees who shall follow the procedure of due diligence as mentioned above and shall ensure that the AMC possesses adequate expertise and infrastructure for making such investments.
It informs the unitholders by communication to each unitholder about its intention to make investment in foreign securities and making all disclosures as mentioned earlier in these guidelines and giving them the option to exit without load in accordance with the provisions of the Regulations. The unitholders shall be given at least 21 days’ time period to exercise their option.
Reporting to Trustees :
The AMCs shall send detailed periodical reports to the trustees which shall include the following aspects:
Performance of investments made in foreign securities in various countries.
Amount invested in various schemes and any breach of the exposure limit laid down in the scheme offer documents.
Review of Performance
Boards of AMCs and trustees shall review the performance of investments made in foreign securities in their meetings by comparing the yield with that of investment opportunities available in domestic markets and shall decide further course of action. In case of schemes investing exclusively in foreign securities, performance may also be compared with appropriate benchmark(s).
Reporting to SEBI
The AMCs and trustees shall offer their comments on the compliance of these guidelines in the quarterly and half-yearly reports filed with SEBI.
7. How to Apply
The mutual funds who desire to invest in foreign debt securities may apply in duplicate in the form enclosed herewith. SEBI would forward a copy of the form to the RBI for their approval as is the procedure in case of making investment in ADRs/GDRs issued by Indian companies.
These guidelines are being issued in accordance with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996.
PROPOSAL FOR INVESTMENTS IN ADRs/GDRs/ FOREIGN SECURITIES
(To be submitted in duplicate)
|Name of the Mutual Fund:|
|SEBI Registration No.:|
|Amount Proposed to be Invested in ADRs /GDRs /Foreign securities (Rs. crores)|
|Net Assets of the Fund as on February 28,2002(Rs crores)|
|Schemes of the Mutual Fund through which investment is proposed:||Name of scheme(s) Type- Equity/debt|
|Whether the investment is consistent with the Investment Objectives of the Scheme (s);|
|Whether the offer document(s) provides for Overseas Investments and discloses the attendant risks. If not, whether option to unitholders to exit without load has been given / is proposed to be given. (Please file a copy of addendum with SEBI while writing to unitholders).|
|Name and Address of the branch of the bank through which Foreign Currency Transactions are to be routed:|
|Details of all overseas service providers proposed to be engaged including custodians, specialised agencies etc. (Details must include name & address, services to be rendered, details of fee arrangement proposed, whether their track record of performance and regulatory compliance considered, their valid registration with overseas regulators, details of experience/expertise, assets under management/custody, etc.)|
1.Boards of AMC and trustees have exercised due diligence as required under Regulation 25(2) and Guidelines issued in this regard.
2. Board of AMC and trustees are satisfied that
1.The proposed investments in ADRs/GDRs issued by Indian companies or foreign securities are consistent with the investment objectives of the above mentioned scheme(s) and are in the interest of investors.
2. The systems and procedures adopted by the AMC including the arrangements made with the overseas service providers are adequate to support such investments and to safeguard the interest of investors.
3. The overseas service providers have sufficient experience, competence and a satisfactory track record of performance and regulatory compliance.
A resolution to the above effect has been passed by the Boards of AMC and trustees on ……….(dates)
(Authorised by trustees )