The Telegraph
Since 1st March, 1999
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Boundaries crumble for mutuals

Mumbai, July 27: Just a nod from capital market regulator Sebi and you can own a piece of Microsoft and Nokia in your stock portfolio.

The Reserve Bank (RBI) today permitted domestic mutual funds to invest in stocks of any foreign company. At the same time, the apex bank raised the aggregate ceiling on overseas investment by mutual funds from $1 billion to $2 billion with immediate effect.

The RBI notification removed an earlier restriction that permitted mutual funds to invest in only those firms which held at least 10 per cent of the equity in an Indian company.

This restriction limited their overseas investment universe to just a handful of US, European and Japanese companies.

Technically, mutual funds will now be able to buy stocks in companies located from Argentina to New Zealand, and from the US to China. However, the funds prefer to wait for new Sebi guidelines, which are expected shortly.

Mutual funds are also currently allowed to invest in rated debt instruments.

The Reserve Bank also decided to allow a limited number of qualified mutual funds to invest cumulatively up to $1 billion in overseas exchange traded funds.

Mutual funds can also invest in American depository receipts (ADRs) and global depository receipts (GDRs) of Indian companies.

“This is a welcome move by the authorities. However, we can work on it only when the final guidelines are put in place by Sebi and we expect them soon,” said Rajat Jain, chief investment officer of Principal PNB Mutual Fund.

Jain manages the Principal Global Opportunities Fund, the first overseas fund to be launched in the country. The fund’s portfolio includes US stocks of Colgate-Palmolive, Procter & Gamble, Ingersoll-Rand, Wyeth, Timken and 3M. It has also invested in shares of Japanese companies like Sumitomo, Mitsubishi, Denso, Honda, Mazda, and Matsushita and European stocks of Atlas Copco, Nestle, SKF, Bayer, Siemens, Novartis and BASF.

According to the RBI notification, Sebi will issue detailed operational guidelines for such investments, including the eligibility criteria, limits, identification of recognised stock exchanges, investible universe and monitoring of aggregate ceilings.

“Since there is an overall ceiling of $2 billion, Sebi will have to work out some internal rationing of investment limits among the mutual funds,” said Dhirendra Kumar of Value Research. The big question is whether Indian mutual funds are equipped to make investment decisions spanning the globe.

“Foreign asset management companies will have an edge in such a scenario. UTI also has the requisite expertise and they had also entered into a tie-up with State Street Global Advisors (SSgA). Others will get into arrangements with overseas advisers,” said Kumar.

Franklin Templeton Mutual Fund had launched a scheme in April which was to invest up to 50 per cent of assets in overseas stocks.

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