In a bid to give a major boost to the domestic mutual fund industry, Reserve Bank of India (RBI) has eased norms for their overseas investments by allowing them to invest in international mutual funds.
In effect, RBI now allows domestic MFs to make nominal exposures to unlisted overseas securities as well as overseas exchange traded funds that invest in securities and ADRs/GDRs of foreign companies.
This move will also enable international fund houses who have registered in India -- such as Fidelity and Franklin Templeton to mention a few -- to market their international products to Indian investors.
The new guideline would also allow Indian investors to participate in big international initial public offerings (IPO) such as the recently-concluded $12 billion IPO by China's Industrial & Commercial Bank of China (ICBC).
Currently, Indian mutual funds are allowed to invest only in ADR/GDRs of Indian companies, rated debt instruments and also equity of overseas companies listed on recognized stock exchanges.
RBI had recently hiked the total investment limit for such investments to US$4 billion, while the individual cap per fund house for overseas investment is US$200 million.
It may be noted that foreign fund houses such as Franklin Templeton, JP Morgan, Fidelity, UBS, BNP Paribas have presence in India and could tap local investors to buy their international products.  At the same time, fund houses such as PNB Principal, Fidelity, Franklin Templeton have already launched products that invest in international securities.

Only CDs in FDI
Meanwhile, the RBI has mandated that only instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as equity under Foreign Direct Investment policy and considered as eligible for issuance to persons resident outside India.
In a circular RBI said: “It has been noticed that some Indian companies are raising funds under the FDI route through issue of hybrid instruments such as optionally convertible or partially convertible debentures which are intrinsically debt-like instruments. Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country.”
Issuance of such instruments is against both the letter and spirit of the FDI policy, which is aimed essentially to attract investments in the nature of equity capital and not surrogate debt instruments, the RBI said.
However, the apex bank has clarified that companies, which have already received funds from outside India for issue of partially or optionally convertible instruments on or before June 7, 2007, can issue such instruments.
Further, it also clarified that the existing investments in instruments, which are not fully and mandatorily convertible into equity, can continue till their current maturity. FIIs are permitted to invest as hitherto, in listed non-convertible debentures/ bonds issued by Indian companies in terms of RBI/SEBI norms on investment in rupee debt instruments, including the ceilings prescribed from time to time.