RBI in consultation with SEBI has allowed Non- resident investors (other than SEBI registered FIIs and SEBI registered FVCIs) who meet the KYC requirements of SEBI, hereinafter called Qualified Foreign Investors (QFIs), to purchase on repatriation basis rupee denominated units of equity schemes of domestic MFs issued by SEBI registered domestic MFs in accordance with the terms and conditions as stipulated by  SEBI and the RBI from time to time in this regard.

Qualified Foreign Investor (QFI) shall mean a person resident in a country that is compliant with Financial Action Task Force (FATF) standards and that is a signatory to International Organization of Securities Commissions (IOSCOs ) Multilateral Memorandum of Understanding, provided that such person is not resident in India. Provided further that such person is not registered with SEBI as Foreign Institutional Investor or Sub-account

The QFIs may invest in rupee denominated units of equity schemes of domestic MFs issued by the SEBI registered domestic MFs under the two routes, namely:

1.  Direct Route –  SEBI registered Depository Participant (DP) route
2.  Indirect Route – Unit Confirmation Receipt (UCR) route

These investments under the aforesaid two routes would be subject to the following terms and conditions:

• Investments by the QFIs would be subject to a ceiling of USD 10 billion under both the routes. For the purpose of this ceiling of USD 10 billion, total amount invested for the purchase of domestic MFs units by all QFIs and the money lying in the single rupee pool bank accounts of DPs would be added.  SEBI will monitor the ceiling of USD 10 billion on daily basis through the concerned domestic MFs and DPs.
• It has also been decided to allow QFIs to invest (under both the routes – Direct and Indirect, subject to the general terms and conditions mentioned ) up to an additional amount of USD 3 billion in units of domestic MF debt schemes which invest in infrastructure (“Infrastructure” as defined under the extant ECB guidelines) debt of minimum residual maturity of 5 years, within the existing ceiling of USD 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.
• Only QFIs from jurisdictions which are compliant with the FATF standards and are signatories to the IOSCOs Multilateral Memorandum of Understanding will be eligible to invest in domestic MFs under this Scheme.
• DPs will ensure KYC of the QFIs as per the norms prescribed by SEBI.
• Domestic MFs would also undertake KYC of the QFIs.
• Units and UCRs issued under this scheme to QFIs, would be non-tradable and non-transferable.
• The investment will be subject to the necessary regulations prescribed by SEBI in this regard from time to time.

Direct Route

• The DP route will be operated through separate single rupee pool bank account to be maintained by the DP with a AD Category I Bank in India. The foreign inward remittances in to the single rupee pool bank account of DPs shall be received only in permissible currency (i.e. freely convertible currency).
• The funds received from the QFIs into this account shall be remitted to the domestic MF either on the same day of the receipt of the funds from QFIs  or by next business day in case  money is received after business hours, failing which the funds would be immediately repatriated back to the QFIs overseas bank account.
• The redemption proceeds of the units will also be received from the domestic MF into this account and shall be repatriated to the overseas bank account of the QFI within two working days of the same having being received in the rupee pool account of the DP. Within these two working days the redemption proceeds can also be utilized for further investment by the QFI under this scheme.
• 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.
• QFIs would be allowed to open a single demat account with a DP in India for investment in rupee denominated units of different domestic MFs equity schemes. However, the QFIs would not be allowed to open a bank account in India.

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.

Our View: The said move by RBI/SEBI is in line with the promise by the Honble Union Minister of Finance in this years budget, to permit SEBI registered Mutual Funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. This move will provide much need respite to the infrastructure industry , which is facing with large liquidity crunch due to drying avenues of funds.