India's market regulator will, in a sweeping overhaul of rules, for the first time allow the $463 billion portfolio management business — funds aimed at high-net-worth individuals — to invest in overseas securities and to engage in short selling of stock options.
In an announcement following Thursday's board meeting, the Securities and Exchange Board of India said such funds will also be permitted to invest in unlisted debt securities, with exchange-traded derivatives exposure capped at up to 1.25 times client assets.
The regulator said in a media briefing that portfolio managers may hold unhedged short positions within prescribed limits, though it did not disclose a specific ceiling. As India's high-net-worth individuals increasingly favor professionally tailored investment products, the industry has grown rapidly in recent years. The new rules significantly broaden their investment options.
Regulatory data shows that this business, classified in India as portfolio management services (PMS), managed assets of about 44.4 trillion rupees (equivalent to $463 billion) as of August, up from 40 trillion rupees a year earlier. The new rules also open a new channel for India's wealthy to invest in global markets, whose appeal continues to rise on the back of the artificial intelligence stock boom.
India had previously allowed individuals to invest in overseas securities, and the mutual fund industry can also participate in overseas investment. However, the policy comes as the South Asian nation faces downward pressure on its currency against the US dollar amid sustained foreign capital outflows.
The securities regulator said overseas investment in stocks and bonds will be carried out through India's Liberalised Remittance Scheme, which allows Indian residents to remit up to $250,000 abroad each financial year. Individuals can currently invest overseas through this channel; the mutual fund industry's overseas investment quota stands at $7 billion, which was exhausted several years ago.
The rule changes stem from a consultation paper released by the Securities and Exchange Board of India in July. Allowing portfolio managers to bet against individual stocks using unhedged options is expected to boost trading volumes on Indian exchanges. Previously, the regulator had introduced measures over several years to curb speculative trading, which slowed market growth.
The Securities and Exchange Board of India also approved a new "pure mutual fund-style" portfolio management service product with a minimum investment threshold of 2.5 million rupees, just half of the 5 million rupee threshold for conventional portfolio management products. In addition, as one of the major reforms in this area, the regulator allowed foreign portfolio investors to participate in non-cash-settled, non-agricultural commodity derivatives trading, expanding the range of market participants. This move is expected to increase trading activity in such products, where retail trading has already risen recently. The regulator said foreign portfolio investors must close out their positions before physical delivery obligations arise.