SEBI frowns at feeder plans, rebuffs two mutual funds

The Securities and Exchange Board of India (SEBI) has expressed discomfort with feeder funds and derivative exposures.
Going by sources, it has rebuffed at least two mutual fund houses which had approached it to start feeder funds on account of the underlying funds’ exposure to derivatives.

Feeder funds are mutual fund schemes that collect money from Indian investors to invest in a foreign fund. Typically, these funds have global mandates such as investing in global commodity companies or regional themes.

Starting from October 2010, SEBI had asked mutual funds to limit their exposure to derivatives in equity funds. They were also restricted from taking leveraged positions or writing options.
The regulator wishes to apply the same principle to global funds as well, according to the head of marketing at one of the top ten fund houses.

“We have been in discussions with the regulator to launch an international feeder fund, but SEBI has expressed discomfort with the derivative exposure of the underlying fund. So we are holding off on the fund for now,” the person said.

The head of a foreign fund house said that the regulator conveyed a similar point of view during an informal discussion on a new product.

“We were planning a feeder fund that would have had derivative exposure but decided to shelve it after talking to SEBI,” said the chief executive officer.

The person points out that most international funds use more derivatives than Indian mutual funds and hence would become inaccesible for Indian retail investors.

“Around 80-90% of the funds based out of Luxembuorg will have derivative exposure, so they are automatically disqualified from having India-based feeder funds,” he said.    

Luxembourg is a major financial centre and a large number of funds are based out of the region. They managed 2185 billion euros (Rs 143 lakh crore) worth of assets as of June 2011, according to data from the Association of the Luxembourg Fund Industry.

A number of mutual fund houses are said to have asked the regulator to consider slightly more liberal guidelines for international funds. Those with an international alliance or which are completely owned by foreign asset managers have asked the regulator to consider leniency, say sources.

For the moment at least, the regulator is yet to budge.

The Indian mutual funds industry’s feeder funds currently have assets of Rs2,890 crore.

SEBI had not responded at the time of writing to an email on the matter sent on Thursday evening.