More than one-and-a-half years after the ban on overseas investment, mutual funds have moved the RBI to enhance the overall industry limit of $7 billion on overseas equity investment.

The industry’s appeal to the banking regulator comes on the back of a sharp jump in overseas remittances by high-net-worth and ultra-high-net-worth investors in the last few months.

Last January, capital market regulator SEBI directed mutual fund houses to stop taking fresh subscriptions in schemes investing in overseas stocks. The directive to stop subscriptions was mainly on account of the mutual fund industry crossing the mandated limit of $7 billion for overseas investments. This aside, there is a separate limit of $1 billion for investing in overseas exchange-traded funds.

After the crash in overseas equity markets last June, SEBI permitted mutual funds to again invest in foreign stocks within the aggregate mandated limit.

Association of Mutual Funds in India had made representations to enhance the limit, particularly after the rise in remittances through the Liberalised Remittance Scheme (LRS) by HNIs and UHNIs.

The recent fall in overseas markets had provided an opportunity for retail investors to enhance their exposure, but they were constrained by the restrictions imposed by the RBI and SEBI.

LRS route

“Though SEBI has reopened mutual funds abroad within the limits, most mutual funds are only marginally below their prescribed limits and are not promoting the scheme to investors on fear of getting into the regulator’s glare if the limits are breached,” said an MF executive.

While retail investors are not allowed to tap overseas equity markets through mutual funds, HNIs and UHNIs are splurging overseas through the LRS route to tap international markets, he added.

Under the LRS scheme, an Indian resident, including minors, can transfer funds of up to $250,000 in a financial year outside India. When introduced in 2004, the remittance limit under LRS was $25,000 a year but was gradually enhanced by the RBI.

Outward remittances through LRS surged by 51 per cent in the June quarter of this fiscal to $9.1 billion, compared to $6.05 billion logged in the same period last year, according to the latest RBI data.

Investments in equity and debt schemes more than doubled in Q1 FY’24 to $504 million, compared to $224 million in the year-ago period.

Similarly, the purchase of immoveable property saw a nearly 122 per cent surge to $89.94 million. Deposits overseas surged by nearly 62 per cent to $430.59 million.

Remittances for the maintenance of close relatives also increased by 78 per cent to $1.83 billion ($1.03 billion). Travel, education, and gifts are the other sectors that attracted major remittances.

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