India’s restrictions on overseas investments have created a two-tier market for global investing, with international exchange-traded funds (ETFs) from domestic fund houses trading at steep premiums to their underlying assets while investors buying overseas-listed equivalents can access them closer to market value.
All six international ETFs in India were trading at a premium on 30 September, with the average premium at 30.4%, according to a Mint analysis of data from Value Research. The Motilal Oswal Nasdaq Q50 ETF had the highest premium, at 63%. An ETF trades at a premium when its market price exceeds its net asset value (NAV), which represents the value of its underlying holdings.
The picture was different two years earlier: on 30 September 2024, three of the six ETFs traded at a discount on the NSE and BSE, with the Motilal Oswal Nasdaq Q50 ETF at the steepest discount of 4% on both exchanges.
The widening premiums reflect a mismatch between demand and supply. Regulatory limits on overseas investments by Indian mutual funds have restricted their ability to buy foreign securities and create fresh ETF units. Meanwhile, demand for global exposure has risen as investors seek diversification beyond Indian equities. Changes in how price bands are calculated for ETFs have also contributed to the widening gap.
“The ability of an AMC to buy the underlying international stocks has gotten compromised due to the RBI-driven limits, which are translated by Sebi and distributed to AMCs. Since these limits allow finite creation of units, this leads to a premium,” said Anil Ghelani, head of passive investments and products at DSP Mutual Fund.