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In accordance with the
announcement made by
Finance Minister Pranab
Mukherjee in his 2011-12
budget speech, the finance ministry
has decided to permit Qualified
Foreign Investors (QFIs) to invest up
to $10 billion in equity and debt
schemes of mutual funds through the
direct route – holding mutual fund
units in a demat account through a
depository participant (DP) that is
registered with the SEBI and the
indirect route – holding mutual fund
units via the Unit Confirmation
Receipt (UCR) issued by an overseas
UCR issuer.
An additional amount of $3 billion
can be invested in debt funds in the
infrastructure sector. Investment by
QFIs will propel the markets,
decrease volatility and boost
infrastructure spending.
“To liberalize the portfolio investment
route, it has been decided to permit
mutual funds that have been
registered with SEBI to accept
subscriptions from foreign investors
who meet the KYC (know your
customer) requirements for equity
mutual fund schemes,” Mukherjee
had said in his budget speech.
He said, “This would enable mutual
funds in India to have direct access to
foreign investors as well as widen the
class of foreign investors who would
invest in the Indian equity market.”
THE DIRECT ROUTE:
DEPOSITORY PARTICIPANT
(DP) ROUTE
This route will be operated through a
separate single rupee pool bank
account to be maintained by the
depository participant (DP). Dividend
payments will be directly remitted to
the overseas accounts of the QFIs.
QFIs can open a single demat account
with a DP in India. However, they are
not allowed to open a bank account in
the country.
Process Flow When QFIs Come For
Subscription Through The Direct
Route
Step 1:
The Qualified Foreign Investors shall
place a purchase/ subscription order
mentioning the name of the mutual
fund scheme with its depository
participant and remit foreign inward
remittances in any permitted currency
directly to the single rupee pool bank
account of the DP.
Step 2:
The DP, in turn, shall forward the
purchase order to the concerned MF
and remit the money to the MF’s
scheme account on the same day as
the receipt of funds from QFIs. In
case of receipt of money after
business hours, DP shall remit the
funds to MF scheme account by the
next business day.
Step 3:
The mutual fund house shall process
the order and credit units of the
mutual fund scheme into the demat
account of the QFIs. If for any reason
the units are not allotted, the mutual
fund house/ depository participant
shall ensure that the money is
remitted back to the QFI’s designated
overseas bank account within three
working days from the date of receipt
of subscription of money in the single
rupee pool bank account of the
depository participant.
How Redemptions Take Place In
The Direct Route Method
Step 1:
QFIs can redeem through delivery
instruction on the receipt of
instruction from QFIs. The DP shall
process the same and forward the
redemption instructions to the MF.
Upon receipt of instruction from DP,
the MF shall process the same and
credit the single rupee pool bank
account of the depository participant
with redemption proceeds.
Step 2:
In case no fresh purchases are made,
the money shall be remitted by the
DPs to the designated bank’s overseas
account of the QFIs within two
working days from the date of the
receipt of money from the MF in the
pooled bank account.
However, the DP can make fresh
purchase of units of equity and debt
schemes of the mututal fund (if so
instructed by the QFIs) out of the
redemption proceeds received,
provided that payment is made
towards such purchase within two
working days of the receipt of money
from the mutual fund house in the
pooled bank account.
THE INDIRECT ROUTE:
UNIT CONFIRMATION RECEIPT
(UCR) ROUTE
Domestic mutual funds can open
foreign currency accounts outside
India for the purpose of receiving
subscriptions from QFIs as well as for
redeeming UCRs. The UCR will be
issued against units of domestic MF
equity schemes and would be
non-tradable and non-transferable.
There are four parties under this route
- QFIs, UCR issuer (based overseas),
SEBI registered custodian (based in
India) and mutual fund house. QFIs
can subscribe/redeem only through
the UCR Issuer.
The mutual fund house shall appoint
one or more UCR issuing agents
overseas and one SEBI-registered
custodian in India. UCR issuer
appointed by the fund house shall act
as an agent of the mutual fund.
The rupee denominated units of the
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