Guidelines for Investing Abroad

Report of the Committee to Frame Guidelines for Mutual Funds to Invest in Overseas Securities Markets

Introduction

1. Reserve Bank of India (RBI), had announced in the credit and monetary policy of October 1997 that the Securities and Exchange Board of India (SEBI) registered Indian fund managers, including Mutual Funds, would be permitted to invest in overseas markets, initially within an overall limit of USD 500 million and a ceiling of US$ 50 million for an individual mutual fund and within such other limits as announced by the Reserve Bank of India from time to time. The announcement is a significant measure as it allows Indian investors for the first time an opportunity to invest in overseas markets.

The Constitution of the Committee

2. Following the announcement by the RBI, SEBI set up a Committee under the convenorship of Mr. Pratip Kar, Executive Director SEBI to draft guidelines for overseas investments. The other members of the Committee were: Ms. Dharmishta Raval (Executive Director, SEBI), Mr. Khizer Ahmed (Chief General Manager, Reserve Bank of India), Mr. A. P. Kurien (Chairman, Association of Mutual Funds of India), Mr. Basudeb Sen (Executive Director, Unit Trust of India), Mr. K.N. Vaidyanathan (Vice President, Morgan Stanley Asset Management) and Mr. Vijay Advani (President and CEO, Templeton Asset Management (India) Pvt. Ltd). Mr. K. G. Chaudhari, (General Manager, Reserve Bank of India) also participated in the deliberations of the Committee. The Committee had also invited outside experts including, Mr. Ajai Kaul (Alliance Capital Asset Management), Mr. Nikhil Khatau (Sun F&C Asset Management) to provide their views on this subject. The Committee had a number of meetings between October 1997 and May, 1998 to discuss various alternative approaches to investing abroad, and recommend guidelines for the purpose.

Approach of the Committee

3. Overseas markets offer attractive opportunities for Indian investors to diversify their investment portfolio, but intrinsic to gaining from these opportunities is a good understanding of the risks involved in such investments. Investment in domestic market is essentially an investment in a single market, in a single currency and in that sense essentially in a single product. Till now, the Indian investor was familiar only with such kind of investment and the risks which go along with it. In investing in overseas markets, he would be exposed to a multi-market, multi-currency and multi- product scenario. While this would give rise to new investment opportunities and portfolio diversification possibilities which would present to him prospects of improving returns, the increase in the number of markets, currencies and products would also add to the number of variables to evaluate, as well as the risks involved. Along with the newness of the concept of investing in developed or emerging markets, there would be also be an increase in the complexity in investment management.

4. The Committee, while welcoming the opportunity to invest overseas, therefore felt that, as this would be the first brush of both domestic mutual funds and investors with investing in overseas markets and as the outcome of the initial experience would determine the future policy and pace of reforms in this area, there is a need for a judicious balance between caution and freedom at the initial stages of implementation of the policy. The Committee was of the view that there should be enough measures in the guidelines, to provide reasonable and adequate safeguards to investors. It was important to take all reasonable measures to ensure a successful implementation of the new policy.

5. The Committee, identified the issues which are critical to investing in overseas markets. These are listed below:

should investing in overseas markets be restricted to new schemes exclusively launched for such a purpose or should existing schemes of mutual funds be also allowed to invest in such markets?
should schemes, new or existing, of mutual funds be allowed to have a mix of domestic and overseas securities or should the schemes which are allowed to invest in overseas securities be exclusive?
should there be a restriction in the type of scheme in which overseas investment be permitted i.e. should the schemes be open ended or close ended.
should individuals be allowed to manage investments abroad or should it be restricted to the asset management companies of Indian mutual funds?
should domestic asset management companies be allowed to tie up with offshore investment advisory entities to supplement expertise levels?
would mutual funds require and be allowed to use the services of specialist service providers, including investment advisors, fund administrators and accountants and custodians?
would the existing fee structure be adequate if such service providers are employed?
what kind of arrangements should be there for physical custody of foreign assets and the relationship between the domestic custodian and the overseas custodian?
how would the mutual fund accounting process work across markets, products and currencies?
what changes would amount to ‘change in fundamental attributes of a mutual fund’ and would, therefore, entail prior approval of unitholders in case an existing scheme is allowed to invest in overseas securities?
should investment avenues be restricted by regulation i.e. through the imposition of quantitative limits or through extensive disclosures in offer documents?
would the existing foreign exchange regulations need to be amended for smooth handling of such investments?

6. The above issues were discussed by the Committee and the recommendations of the Committee are as follows.

Mechanism for Investing Overseas

7. The credit policy of the RBI has opened overseas investment opportunities to all mutual funds registered with SEBI. Accordingly, all mutual funds registered with SEBI should be eligible to apply for permission to SEBI to invest in the overseas markets. SEBI may consider working out an eligibility criteria before granting permission to a mutual fund to invest in overseas markets. The mutual funds which are permitted by SEBI, will also be required to comply with the requirements of RBI. The procedure similar to that adopted by SEBI and RBI for granting permission under FERA and registration to foreign institutional investors and for money market mutual funds, could be followed for granting permission to mutual fund schemes investing abroad. Each mutual fund can invest a maximum of USD 50 million through one or more schemes and collectively, all mutual funds will invest a maximum of USD 500 million, or as subject to such other individual/collective ceiling as stipulated by the Reserve Bank of India from time to time.

8. The credit policy of RBI permits SEBI registered fund managers also to invest overseas. The Committee noted that SEBI does not register fund managers as separate category of intermediaries. The asset management companies are approved by SEBI under the Mutual Fund Regulations as a part of the registration of a mutual fund. SEBI, however, registers portfolio managers as a separate category of intermediaries, which manage individual or corporate investment portfolios as opposed to pooled portfolios as in case of mutual fund schemes. Consistent with the Committee’s approach described in paragraph 4 of this Report, the Committee believes the investing entity should have adequate experience in investment management business. Therefore, the Committee recommends the term "SEBI registered fund managers" be initially limited to asset management companies of SEBI registered Indian mutual funds.

9. On the question whether existing schemes of mutual funds should be allowed to invest in overseas markets or should exclusive schemes be launched for the purpose, the Committee was of the view that the asset management companies should be given the freedom to decide on the choice of investment and structure of schemes, which should be consistent with the investment objectives of the schemes.

10 The Committee therefore recommends that

mutual funds should be allowed to invest through schemes either exclusively meant for overseas investments or as a part of a scheme which includes domestic investment;
schemes investing in overseas securities markets, may be open ended or close ended.
even existing schemes of mutual funds may invest in overseas securities markets, consistent with the investment objectives of the scheme, and where the offer documents provide for such investments;
if there is no provision in the offer document of an existing scheme, the mutual fund must in the interest of unitholders seek their approval/consent as may be prescribed by SEBI for open ended and closed ended schemes of mutual funds including UTI.

11. Mutual Funds desirous of investing in overseas markets - either exclusively or partially - through a new scheme to be floated shall file an offer document and other related documents with SEBI, as specified later in the guidelines.

12. The investment ceiling per mutual fund and the aggregate investment ceiling for all mutual funds need to be monitored. The Committee recommends that the Fundwise investment ceilings shall be monitored by the trustees of the Fund who will report to SEBI at periodic intervals in formats prescribed by SEBI. The aggregate investment limit for all mutual funds will however be monitored by SEBI based on the periodic reports. SEBI would inform RBI about the utilisation of the investment ceiling by mutual funds. To help SEBI monitor the individual Fundwise and aggregate ceilings, mutual funds will be required to specify the maximum allocation within a single scheme for overseas investment, in its application for permission to SEBI. Such maximum allocation would be earmarked against the ceiling of US$ 50 million, irrespective of actual investment made by the scheme.

13. The Committee is of the view that given the aggregate limit for overseas investments across mutual funds, there should a time limit placed on the utilisation of the investment ceilings applied and approved for each scheme. This will help ensure the maximum utilisation of the aggregate investment ceilings by all mutual funds. The Committee recommends that a mutual fund should be allowed a period of six months from the date of permission obtained from SEBI to completely exhaust the permitted limit for overseas investment, and at the expiry of the period the mutual funds will be required to approach SEBI for any extension. While examining the request, SEBI could inter alia take into account the demand for overseas investment representations made by other mutual fund seeking approval/extension and the seriousness of the applicant which is seeking extension. In case a mutual fund does not seek an extension at the expiry of six months, it would be assumed that the mutual fund has let the unutilised limit lapse and SEBI will duly intimate the mutual fund in this regard.

Appointment of Service Providers

14. The Committee recognises that some of the mutual funds operating in India currently may not have the necessary expertise, experience and wherewithal to invest in overseas markets. Therefore, to supplement the existing expertise, the Committee recommends that mutual funds may be allowed to appoint one or more offshore investment advisor(s), sub advisor(s) or sub investment manager(s) to manage the overseas investment on a discretionary / non discretionary basis.

15. The Committee is of the view that under any circumstance, irrespective of whether a mutual fund appoints an offshore advisor for any of its schemes which chooses to invest in overseas markets, the responsibility and obligations arising out of such investments shall continue to vest with the asset management company of the mutual fund.

16. The appointment of investment advisors/ sub advisors must be approved by the Trustees and they must enter into a tripartite sub advisory agreement with the asset management company and the Trustees specifying the authority and responsibility of the investment advisors/ sub advisors. While the AMC will be principally accountable to the Trustees for the acts of such investment advisors/ sub advisors it will remain obligatory on the part of Trustees to oversee these activities.

17. In order to support the investment process through trade clearing and settlement and to keep custody of securities, the Committee recommends that mutual funds may be allowed to appoint one or more overseas sub custodians to keep custody of the investments abroad, with the approval of the Trustees. The overseas sub custodians will be required to enter into tripartite agreement with the domestic custodian and the mutual fund specifying the responsibilities of the sub custodians and domestic custodians in respect of custody of overseas securities. There shall be no dilution in the responsibility of the domestic custodian who will be the only custodian for the mutual fund subject to the purview of the RBI and SEBI. While the custodian will be principally accountable to the Trustees for the acts of the sub custodian(s), it will also remain obligatory on the part of the Trustees to provide oversight over these activities.

18. Besides offshore investment advisors and sub advisors and custodians, the Committee recognizes that a mutual fund scheme investing in overseas markets may need the services of other specialist agencies to assist the mutual fund in accounting, maintenance of books, computation of Net Asset Value (NAV), and providing legal advise and research and valuation.

19. The Committee recommends that mutual funds investing in overseas securities markets may be allowed to appoint such service providers to provide mutual fund accounting for overseas investments, valuation of assets, computation of NAVs and legal advise and research subject to the approval of the Trustees. The Asset Management Companies and the Trustees will enter into a tripartite agreement with all such agencies/ service providers.

Fees & Expenses

20. The Committee also recommends that trustees should ensure that all service providers appointed by mutual funds hold registration/licence from the regulatory authority if so applicable, and should also not have been debarred from carrying out the activities by the regulatory authority of that country.

21. The Committee reviewed the fee schedule of a number of overseas funds and has drawn the following summary of the annual expenses (excl. sales & distribution charges) :

Fund Type Shareholder Fund Investment Other Total
Servicing Adm. Mgmt/Adv Expenses

Equity/Balanced 75-125bp 10-20bp 75-150bp 40-125bp 200-420bp

Emerging Market 75-100bp 10-20bp 90-200bp 80-260bp 255-480bp

Fixed Income 40- 60bp 10-20bp 25-125bp 20-145bp 95-350bp

(Expenses as a percentage of Net Assets. 100bp=1%) (Source - Alliance Capital / Morgan Stanley)

22. The Committee recognizes that in identifying and selecting investment opportunities across various overseas markets the Indian mutual fund would need to access international expertise in investment management, custody and fund accounting. This would involve payment of fees to these agencies. Such fees must also be internationally competitive, to ensure that the mutual funds appoint quality service providers. Also, the fee and expenses ratio would vary depending on the investment avenues chosen. For example, investing in fixed income securities in developed markets would be extremely economical when compared with investment in equities in emerging markets. The Committee therefore, recommends that to the extent of overseas investments, restrictions on fees and expenses as stipulated in SEBI (Mutual Funds) Regulations, 1996 be relaxed.

23. Mutual Funds desirous of investing in overseas markets in new schemes would be required to provide in their respective offer documents the specific details of fees and expenses proposed to be charged to the scheme with adequate justification Mutual Funds should also disclose in detail the impact of fees and expenses in percentage terms on NAV. This would ensure that investors in such schemes are fully made aware up front the costs that would be effected on their investments in that scheme.

24. Mutual Funds desirous of investing predominantly in overseas markets out of existing schemes (predominance being defined as at least 90% of the assets of existing scheme), should disclose the fees/expense structure applicable to the extent of overseas investment. This disclosure should be made in the notice sent to unitholders. It is also recommended that such fees/ expenses applicable to the overseas portion of the investments of the scheme be represented in percentage terms on NAV to enable investors to become fully aware of the impact on their investments in that scheme. Since the proposed fee schedule could have a bearing on existing domestic mutual funds, the Committee recommends that suitable amendments be made to SEBI (Mutual Funds) Regulations to incorporate the change.

25. Mutual Funds may propose to invest overseas through overseas mutual fund, unit trust or similar investment vehicles. For this purpose, the domestic mutual asset management company may be required to pay management fees to the offshore mutual fund. Currently the SEBI (Mutual Funds) Regulations 1996 prohibits a scheme of a mutual fund from investing in another scheme under the same asset management company or any other mutual fund.

26. The Committee recommends that the above regulations be amended to allow the domestic asset management companies to pay management fees to the overseas fund manager or advisor. The domestic asset management company may also be allowed to charge management fees. The domestic management fees and the overall expenditure will be subject to the ceiling prescribed in the existing regulations for management fees and paragraph 24.

Granting Approval to a Mutual Fund to Invest in Overseas Securities Markets and Disclosures

A. Procedure for granting approval to a Mutual Fund

27 Before granting permission to an existing mutual fund to invest in overseas securities markets, either through existing or new schemes, SEBI would need to satisfy itself about its track record on compliance and ensure that there are no pending regulatory issue which could have a material adverse effect on new business of the mutual fund. Further, all mutual funds seeking permission would also be subject to such other requirements that SEBI (Mutual Funds) Regulations, 1996 envisage for a launch of a domestic mutual fund scheme.

28. Additionally the mutual funds must also demonstrate to SEBI and SEBI must satisfy itself that the mutual fund has a mechanism and structure put in place to support the overseas investment management process. While providing details of the arrangement made between the mutual fund, its Asset Management Company and any other appointee(s) as investment advisors, sub advisors and sub investment managers, custodians, legal advisors etc. the applicant mutual fund would be required to provide details of such appointees in terms of :

track record in global investments (minimum of 5 years in global investing),
regulatory authority that they are subjected to in their home country, and continue to hold the certificate of registration,
experience / expertise in managing investments across global markets,
details of assets under management (atleast USD 2 Billion),
details of any regulatory/legal action in the previous three years which would have a material bearing on proposed investments,
copy of agreement proposed to be entered into with such appointee
details of fee arrangement proposed

29. Before granting permission to a mutual fund, SEBI would also need to be satisfied that the investment management process, either through the existing AMC and / or through appointees, is in place and there are adequate systems to support research into global markets and stocks, trade execution capability, mechanism to monitor market movement and its impact on investments, systems to evaluate investment alternatives, reporting and compliance monitoring systems and that the that the mutual fund has established adequate sub custody arrangements to safeguard the assets invested overseas. However, SEBI should make it obligatory on the Trustees to ensure that the process is monitored on an ongoing basis to retain its integrity and ensure adequate protection to the investors.

30. The mutual funds would also be required to provide details on :

the track record of subcustodians who would hold custody of international assets,
regulatory authority that they are subjected to in their home country,
details of any regulatory/legal action in the previous three years which would have a material bearing on the proposed sub custody arrangement
experience / expertise of the sub custodian,
details of assets under custody (atleast USD 1 Billion)
details of operating / reporting systems,
linkage established with the AMC and existing custodian of the Mutual Fund,
copy of agreement proposed to be entered into with such sub custodian
details of fee arrangement proposed

31. Mutual funds desirous of availing the services of a professional fund accounting agent for the overseas investments should provide details of the arrangement alongwith the fee / expense structure agreed upon for such service. SEBI would seek to be satisfied that the fund accounting agent has adequate expertise and experience in handling such function across global markets. SEBI would make it obligatory upon Trustees to ensure that the systems and procedures adopted by the fund accounting agent help establish a true and fair value of the overseas investments.

B. Scheme Offer Document

32. The offer documents of new scheme shall be filed with SEBI and SEBI will provide comments as per the current procedures specified in SEBI (Mutual Funds) Regulations 1996.

33. In case of new schemes, mutual funds, through the offer documents, would be required to make full and complete disclosure on the proposed nature of investments, the risks associated with such investments, the markets they propose to access, risks associated with such markets, exchange risks and such other risks as would impact the investments of that scheme. The disclosures have to be exhaustive and be written in a language comprehensible to an average investor in mutual funds. Further, new schemes proposing to invest overseas only partially will have to disclose that there may not be readily available and widely accepted benchmarks to measure performance of such schemes, given its hybrid nature. SEBI, while providing comments, could direct a mutual fund to make further disclosures in case the disclosure are not satisfactory.

34. In case of mutual funds proposing to invest a portion of the assets of existing schemes, SEBI, while granting permission, would seek to be satisfied that the existing disclosures in the offer documents are adequate and sufficient. SEBI must also ensure that full disclosures are made to the unitholders in case an existing scheme seeks to invest a portion of its assets in overseas securities markets. The mutual funds would also need to bring to the unitholders attention the non availability of a ready and widely accepted benchmark for performance measurement for schemes investing overseas.

35. In case of mutual funds proposing to invest a portion of the assets of an existing schemes and if the existing offer documents does not provide for investing abroad, then such mutual funds should obtain prior approval from unitholders, (as mentioned earlier in paragraph 10(d) in this Report) as it entails a change in the fundamental attributes of a mutual fund scheme. For the purpose of obtaining approval of unitholders, mutual funds should follow the procedures as laid out in the SEBI (Mutual Funds) Regulations, 1996.

Investment Norms and Restrictions

36. While the Committee does not propose a specific asset allocation model nor restrictions on markets / products / currencies, SEBI would make it obligatory upon Trustees to ensure that the schemes’ assets invested overseas present a well diversified portfolio consistent with the investment objectives of the schemes.

37. Mutual Funds would be permitted to invest in securities which are listed and traded on overseas stock exchanges and / or securities which are traded on an over the counter basis. SEBI would need to be satisfied that full and complete details of investment objectives, strategy and areas of focus have been communicated to the investors in a manner to ensure that an average investor is able to familiarize himself with the risks involved in such investments.

38. The Committee anticipates that a number of mutual funds may prefer to gain overseas experience and exposure through investing in mutual funds, unit trusts or such other vehicles which attempt to provide diversification of investments. The Committee is of the view that such modes of investment through a pooled vehicle rather than investing directly may be useful initially and also cost effective and may be allowed. In the opinion of the Committee, SEBI should, in such cases, require the mutual funds to provide disclosures of the kind of vehicles, the minimum standards of regulatory oversight that such vehicles would need to have, the cost/expense structure loaded onto such vehicles and such other details so that the investors are aware of the risks involved in such investments. While the Committee recommends that no restriction be placed on the extent of a scheme’s assets be invested in a single vehicle, SEBI would make it obligatory upon Trustees to ensure that the vehicles chosen provide the required diversification to the portfolio and help achieve the investment objective of the scheme.

39.   The Committee however recommends the prudential norms given in the following paragraphs.

40.   Mutual funds may not purchase securities of any foreign issuer if, upon such purchase, the fund owns more than 10% of any class of the securities of such issuer. However, this limit shall not apply to (i) securities representing government obligations or the obligations of any agency or instrumentality thereof, provided the sovereign rating of such government is of minimum investment grade, (ii) fixed income securities issued by private corporations, semi government agencies, provided such securities are of minimum investment grade, (iii) bank deposits and bank obligations, including certificates of deposits, time deposits and bankers' acceptances denominated in any currency, provided such banks have a credit rating of minimum investment grade, (iv) investments in mutual funds, unit trusts and similar investment vehicles, provided such mutual funds, unit trusts and similar investment vehicles represent a well diversified portfolio.

41.   Mutual fund will not invest in any security if the incremental purchase could cause the mutual fund to own more than 10% of the total assets of the mutual fund in that single security. However, these provisions mandating diversification could be waived for such investments that are exempt from the restriction under paragraph 40.

42. Mutual Funds may not underwrite or subunderwrite securities of other issuers.

43. Mutual Funds may not invest in securities not listed on any exchange nor traded on an over the counter basis, unless such investments are through primary / secondary offerings on completion of which the securities will be listed on any exchange or be eligible for trading over the counter.

44. Mutual funds may enter into index options only for the purpose of hedging the risk of fluctuations of the securities within a portfolio or for the purpose of the efficient management of the portfolio, provided (i) the aggregate value of such options does not exceed the total value of assets of the Fund, (ii) the options do not result in a short position, and (iii) the options are quoted on a stock exchange or dealt in a regulated market. Such options must either be listed on an exchange or dealt with highly rated counterparties operating in a regulated market. The option premium will be allowed to be capitalised.

45. Mutual funds may deal in stock index futures for the purpose of hedging the risk of fluctuation of the value of the assets in the portfolio or for the purpose of efficient portfolio management, provided the aggregate value of such stock index futures does not exceed the total value of assets of the Fund. Such stock index futures must either be listed on an exchange or dealt with highly rated counter parties operating in a regulated market.

46. As investing abroad invites exposure to foreign exchange markets, mutual funds may be permitted to enter into forward currency contract or currency futures in foreign exchange only for the purpose of hedging currency risks, provided the aggregate value of such contracts does not exceed the total value of assets of the Fund. Further mutual funds may be permitted to renew, cancel, prematurely deliver, extend and make such amendments to the foreign exchange contract as the mutual fund deems appropriate in the interest of its investors. All fees paid and received on such contracts will be deemed to be of capital in nature (and not from revenue account) and would, therefore, be included in the computation of the utilisation of the USD 50 million ceiling per mutual fund. Mutual funds will not be permitted to enter into such contracts for speculative purposes. In its reporting to RBI, mutual funds would reflect all payments made in foreign exchange - both capital and revenue accounts. mutual funds would also be required to report details of forward / future foreign exchange contracts outstanding including details of any costs / fees paid on booking, rollover or on any other amendment.

47. Mutual funds may enter into interest rate futures contracts, deal in options on interest rates or enter into interest rate swap transactions only for the purpose of hedging the risk of assets of a portfolio or for the purpose of efficient portfolio management, provided the aggregate value of such contracts does not exceed the total value of assets of the Fund. Such options on interest rate futures must either be listed on an exchange or dealt with highly rated counterparties operating in a regulated market and the premium on such options will be capitalised.

48. Mutual funds will not be permitted to borrow and / or leverage either explicitly or implicitly. As mentioned in paragraphs 44 and 45, the use of derivatives by the mutual funds must be restricted to hedging exposure and efficient portfolio management and under no circumstances could mutual funds use derivatives for speculative purposes. No mutual fund may enter into short sale of securities or hold short positions on derivatives.

49. Mutual funds may invest in ADRs, GDRs or such other securities issued overseas by Indian issuer as and when permitted/or policy clarified by Government and RBI. However, a mutual fund may invest in mutual funds, unit trusts and such vehicles, overseas which in turn have invested in ADRs, GDRs or such other securities issued overseas by Indian issuers, provided the vehicle overseas has a well diversified portfolio.

Amendments to Regulations Relating to Foreign Exchange and Taxation and Mutual Funds

50. To facilitate the process of investing abroad, the operational and approval procedures must be simple and quick. The recommendations in the following paragraphs have been made keeping these objectives in view.

51. The Committee recommends that Mutual Funds permitted by SEBI to invest in overseas be provided a one time approval by the Reserve Bank of India under Exchange Control Regulations to support the overseas investment activities. It is specifically recommended that the approval provided by RBI should cover areas including conversion between Indian Rupees and foreign currency for investment, disinvestment and repatriation. With respect to foreign exchange exposure hedging, it is recommended that the RBI approval allows Mutual Funds to enter into foreign exchange currency hedging contracts, effect delivery under such contracts, renew, cancel, prematurely deliver, extend and make such amendments to the foreign exchange contract.

52. In order to simplify the day to day operations of the mutual funds investing overseas, the Committee recommends that the RBI approval be exhaustive to cover payment of fees and expenses overseas, but within the framework of such fees/expense structure as detailed by the mutual funds and approved by SEBI.

53. The Committee recommends that a mutual fund be allowed to nominate a designated bank branch through which it proposes to conduct all foreign exchange transactions including remittances of monies, inward and outward. The Committee recommends that RBI, through its approval under Exchange Control, authorize the designated bank branch to effect such foreign exchange remittances, inward and outward, under such terms and conditions as RBI may set. Further, the Committee recommends that such authority to a designated bank be provided on a one time basis through the existence of that mutual fund scheme. The Committee recognises that every Mutual Fund would be required to provide RBI with information on all foreign currency transactions, both on capital account and revenue account of that Mutual Fund.

54. Mutual Funds will be required to open and operate one or more bank accounts overseas either directly or through the custodian / sub custodian. The Committee recommends that RBI, in its approval, permit Mutual Funds to open and operate such accounts.

55. The Committee recognizes that investments by mutual funds abroad are mere portfolio investments and are not made with an intent to gaining control / influence over management in corporations overseas. The Committee, therefore, recommends that such overseas investments by mutual funds be exempt from the purview of RBI Guidelines for joint ventures abroad.

56. The Committee recommends that SEBI and RBI to take up with the Government of India not to levy any withholding tax on any amounts transferred overseas and/or repatriated from overseas, provided such amounts represents the assets of the scheme investing overseas, including principal, incomes and capital gains and/or monies remitted abroad for payment of expenses to the service providers of the mutual funds.

57. The Committee recommends that the SEBI (Mutual Funds) Regulations, 1996 be amended and suitable guidelines be issued for investing overseas as stated above and as amended from time to time.

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