In a bid to attract foreign investments into the Indian equity markets at a time when panicky foreign institutional investors are pressing the sell button, the banking and markets regulators and the government have jointly taken a decision to allow non-resident investors to purchase on repatriation basis rupee denominated units of equity schemes of domestic mutual funds, subject to a ceiling of $13 billion.

This liberalisation on investing in mutual funds comes in the wake of the ongoing global financial turmoil following the downgrade of US sovereign rating, the Eurozone debt crisis, and volatility in the domestic equity markets.

Non-resident investors also known as ‘Qualified Foreign Investors’ (other than SEBI registered Foreign Institutional Investors and Foreign Venture Capital Investors) should meet the ‘Know Your Customer’ requirements of SEBI to purchase units of equity schemes of domestic MFs issued, the RBI said in a statement.

QFIs can invest in rupee denominated units of equity schemes of domestic MFs under two routes namely: Direct Route – SEBI registered Depository Participant (DP) route; and Indirect Route - Unit Confirmation Receipt (UCR) route.

Investments by QFIs would be subject to a ceiling of $10 billion under both the routes.

Further, QFIs will also be allowed to invest (under Direct and Indirect routes) up to an additional amount of $3 billion in units of domestic MF debt schemes which invest in infrastructure debt of a minimum residual maturity of five years, within the existing ceiling of $25 billion for FII investment in corporate bonds issued by infrastructure companies.

The investment under both the routes by the QFIs will be in the units which are directly issued by the domestic MFs and no secondary market purchases would be allowed.

SEBI will monitor the ceiling of $10 billion on a daily basis through the concerned domestic MFs and DPs.

Under the direct route, a separate single rupee pool bank account is maintained by the DP with an Authorised Dealer Category I Bank in India. Funds received from the QFIs into this account will be remitted to the domestic MF.

Dividend payments on units held by QFIs would have to be directly remitted to the overseas accounts of the QFIs by the domestic MFs and dividend payments to QFIs would not be allowed as an eligible credit to the single rupee pool bank account.

Redemption proceeds of the units will also be received from the domestic MF into this account and will be repatriated to the overseas bank account of the QFI.

Under the indirect route, domestic MFs would be allowed to open foreign currency accounts outside India for the limited purpose of receiving subscriptions from the QFIs as well as for redeeming the UCRs. The UCR will be issued against units of domestic MF equity schemes.

Source : Business Line