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MFs can't invest in GDRs of non-Indian cos: Ministry

Shaji Vikraman

NEW DELHI, May 27

THE Finance Ministry has rejected the recommendation of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to permit Indian mutual funds to invest in American depository receipts (ADRs) and global depository receipts (G DRs) of non-Indian companies.

The proposal to diversify the investment avenue for Indian mutual funds has been stymied by the Finance Secretary, who has expressed the view that this should not be allowed now, according to officials here. No specific reason has been assigned for rejec ting the proposal, they said.

Under the overseas investment policy for domestic mutual funds framed in 1999, they are allowed to invest only in GDRs and ADRs of Indian companies. The Government fixed an overall investment ceiling of $500 million for mutual funds with the individual s ub-ceiling being $50 million.

However, over the last two years, Indian mutual funds have hardly ventured overseas going by the investment figures monitored by the RBI and the Ministry.

So far, the investment in Indian paper abroad by the mutual funds has been below the $100-million mark. The bulk of the investment _ over $90 million _ has been made by the Unit Trust of India.

Worries over the performance of local equity schemes during the last year and also currency risks may well have prompted the fund managers to ignore this investment option.

Last year, while reviewing the overseas investment policy for mutual funds, both the regulators _ the RBI and SEBI _ made out a strong case for permitting the mutual funds to invest in GDRs or ADRs issued by top international companies. This was suggeste d presumably to help the funds diversify their portfolio in favour of stocks of international blue chip companies.

The original intention of opening up the overseas investment route was to help local fund managers diversify their investment and also to put them on an equal footing vis-a-vis the foreign institutional investors (FIIs). Earlier, the FIIs could gain on a rbitrage.

However, when the policy was framed in 1999, surprisingly, the investment choice was restricted to just ADRs and GDRs of Indian companies only resulting in concentration of investment in a handful of Indian GDRs or ADRs, as the majority of the GDRs of In dian companies are hardly traded. In the process, some of the laggards in the list of Indian GDRs also got a leg-up, analysts said.

Now, when the bias was sought to be corrected, top officials of the Finance Ministry have not supported the move.