Finance ministry has just said that mutual funds will not be classified as foreign investors. Why is that so important to Indian mutual funds?

In a move that was long expected, the Finance Ministry exempted largely foreign owned mutual funds from being categorized as foreign investors. This categorization would have subjected them to foreign direct investment (FDI) sectoral caps and various Foreign Exchange Management Act (FEMA) rules and regulations from time to time. To appreciate this point, you need to go back to the circular issued by the Finance Ministry on October 17, 2019 which had classified mutual funds with more than 50% foreign shareholding as foreign investors. Apparently, the ministry had ignored the fact that mutual funds are investment vehicles for unit holders and the ownership is only incidental not central to the fund. That issue has been clarified with the ministry explicitly excluding mutual funds from the categorization; or in other words the status quo has been restored.

It may be recollected that the circular had defined mutual funds with more than 50% foreign shareholding as foreign funds and this would have put tremendous investment and transfer restrictions on these funds. The irony was that even retail domestic money invested in schemes of foreign-owned mutual funds would be counted as foreign money only. For example, if a company is permitted 74% foreign shareholding under FDI rules, then any investment in the said company by an Indian mutual fund with more than 50% foreign holding would be considered part of the 74% cap. That is patently unfair and that stands scrapped. Now the foreign funds will only be required to make additional disclosures on their investment activity.

This will come as a boon for many large fund houses that are substantially foreign owned and this includes marquee names like HDFC Mutual Fund, ICICI Prudential Asset Management Co. and Mirae Asset Mutual Fund among others. All these funds and their investors would have been directly impacted by the move as all of them have over 50% foreign ownership. MFs and AMFI had represented to government in this regard.