MFS may turn to Sebi over FEMA tweaks

Foreign-owned or -controlled mutual funds plan to approach market regulator Securities and Exchange Board of India (Sebi) after being stumped by the tweak in the Foreign Exchange Management Act (FEMA) guidelines, notified a few days ago.

The Association of Mutual Funds in India (Amfi), an industry body, is likely to take up the issue with Sebi on behalf of these fund houses, said people in the know. The fund houses are likely to make separate representations to the Department of Economic Affairs and the Reserve Bank of India, after consultations with Sebi.

“We will have to knock on every door,” said a senior fund official. “We have reached out to like-minded fund houses and will seek Sebi’s assistance. Eventually, the finance ministry would have to take a call.” In the meantime, individual fund houses are consulting legal advisors to get a handle on the issue and assess the extent of the impact. “Everybody is still trying to understand what the issue is. If this is the law of the land, what needs to be done to ensure we are compliant?” said another senior fund official.

Market watchers believe that the change in guidelines fly in the face of some of the recent initiatives taken by the government, such as easing norms for foreign portfolio investors (FPIS). “When regulations for foreign investors are being made easier, the government is introducing constraints on investments by mutual funds that cater predominantly to domestic investors. What is the point of introducing caps just because the manager is foreign?” said the second official.

“Technically, the FDI regime does not apply to broad-based portfolio investments, even to those coming from outside India. It is applied to investments such as those made for a joint venture or for buying a company. For investments from domestic broad-based mutual funds to get classified as FDI is a misstep that needs to be resolved quickly,” added the first official.

On October 17, the Centre notified new rules with regard to foreign investment in nondebt instruments, classifying mutual funds that invest more than 50 per cent in equity as ‘investment vehicles’.