In pursuance of the policy formulated by the Ministry of Finance, Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have liberalized the investment route for foreign investors in mutual fund (MF) schemes. Until now only FIIs and sub-accounts registered with SEBI and NRIs were allowed to invest in MF schemes. Pursuant to circulars dated August 9, 2011 of SEBI and RBI, permission has been granted to certain other foreign investors termed as qualified foreign investors or QFIs to invest in equity and debt schemes of MFs. Such QFIs can invest through either of the following two routes viz. direct route (holding MF units in demat account through a SEBI registered depository participant) or indirect route (holding MF units via unit confirmation receipts).
The indirect route wherein a QFI invests through unit confirmation receipt (UCR) is a novel concept in the area of mutual fund investments and is similar to the mechanism of issuance of depository receipts by Indian companies under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 (DR Scheme). The DR scheme is a common method adopted by Indian companies to raise foreign funds and is currently the only legal mechanism available to Indian companies to raise foreign funds through the depository receipt mechanism.
The issue structure in an issuance of depository receipt under the DR Scheme is as follows: an eligible Indian company issues shares or bonds which are held with a domestic custodian bank. These shares or bonds form the underlying security and are denominated in Indian currency. Against these underlying securities, an overseas custodian bank, upon being authorized by the Indian company, issues depository receipts which may be denominated in any freely convertible foreign currency. Thus the depository receipt is a financial instrument created by the overseas depository bank outside India and is issued to non-resident investors against the issue of ordinary shares or bonds of an Indian company.
The SEBI circular lays down a similar mechanism as above, for investment by the QFIs. Accordingly, the MF would issue rupee denominated units of the MF which would be held as the underlying by the custodian in India. Against this underlying the UCR issuer based overseas would issue UCRs to be held by the QFIs. Thus, as is the case under the DR Scheme, there are four parties involved via the foreign investor, the receipt issuer, a domestic custodian and the Indian issuer.
