Current Affairs 3rd June 2024 for UPSC Prelims Exam

SEBI’s Proposed Framework for Mutual Funds

Context: The Securities and Exchange Board of India (SEBI) released a consultation paper proposing a framework for facilitating investments by domestic Mutual Funds (MFs) in their overseas counterparts, or Unit Trusts (UTs) that invest a certain portion of their assets in Indian securities.

Purpose of the Framework

• The initiative seeks to leverage India’s strong economic growth and the attractiveness of Indian securities to foreign investors.
• SEBI highlighted the substantial exposure of international indices like the MSCI Emerging Markets Index to Indian securities, which stands at 18.08%.
• The proposal addresses the current hesitation among domestic MFs caused by ambiguities about investing in overseas instruments that include Indian assets.

Proposed Regulations

• Investment Cap: SEBI has proposed that overseas instruments should not hold more than 20% of their net assets in Indian securities.
  • This cap is intended to maintain a balance, allowing Indian funds to invest abroad while limiting excessive exposure to domestic securities.
  • Consequences of Breaching the Cap: if an overseas instrument exceeds the 20% investment cap in Indian securities, the Indian mutual fund investing in it will enter a six-month observation period during which the overseas fund must rebalance its portfolio to comply with the cap.
    • Failure to adjust within this period will compel the Indian MF to liquidate its investment in the overseas instrument.
• Investment Pooling: The framework requires that contributions from all investors in an overseas MF/UT be pooled into a single vehicle to ensure equitable distribution of gains, without any preference.
• Autonomous Management: Investments should be managed autonomously by the managers of the overseas instruments without influence from investors or undisclosed parties.
• Transparency and Disclosures: SEBI mandates periodic public disclosures of the portfolios of overseas MF/UTs to maintain transparency.
• Advisory Relationships: The proposal strictly prohibits any advisory agreements between Indian MFs and overseas MF/UTs to avoid conflicts of interest and ensure fair play.

Other Considerations

• The RBI’s current limit on overseas investments by mutual funds remains unchanged.
• This means that the proposed changes may not have an immediate practical impact, as the overall industry limit is already exhausted.
• However, industry experts believe that such investments can provide valuable diversification opportunities for Indian investors in the future.

Volcanoes and Climate Change

Context: A new study published in the Journal of Climate that the Hunga Tonga-Hunga Ha’apai, an underwater volcano, erupted in January 2022, has had surprising and lasting effects on the climate.

Impact of Eruption On Climate

• Ozone Depletion: The eruption contributed to a significant enlargement of the ozone hole observed from August to December 2023.
  • The large volume of water vapour released by the eruption played a role in chemical reactions that destroyed ozone molecules.
• Influence on Weather Patterns: The presence of water vapour in the stratosphere influenced the Southern Annular Mode, leading to an unusually wet summer in 2024 for Australia, which was unexpected given the concurrent El Niño conditions.
  • This indicates that the eruption’s impact on atmospheric conditions could override or interact complexly with other climatic phenomena.
• Regional Weather Changes: The eruption is expected to affect winter weather patterns up to 2029, with predictions of colder and wetter winters in northern Australia, warmer winters in North America, and colder winters in Scandinavia.
• Atmospheric Waves: The eruption altered atmospheric wave patterns, which impact weather systems such as highs and lows.
• Minimal Effect on Global Temperatures: Despite its other substantial impacts, the eruption had a very small effect on global mean temperatures, causing an increase of only about 0.015 degrees Celsius.
  • This minimal change suggests that the direct warming effect of the water vapour was overshadowed by other factors influencing global climate.

Conclusion

• The Hunga Tonga eruption has provided new insights into how significant quantities of stratospheric water vapour can influence the Earth’s climate and weather patterns.
• The findings underline the need for ongoing research to understand and predict the complexities of volcanic impacts on global climate dynamics.

Examples, Case studies and Data

International Relations (GS2): In the fiscal year 2023-24, Singapore was the largest source of foreign direct investment (FDI) into India, despite a general contraction of overseas capital inflows by about 3.5% due to global economic uncertainties.

• FDI from Singapore to India decreased by 31.55%, amounting to $11.77 billion, yet it remained the highest contributor compared to other countries.
• The FDI equity inflows into India also declined from other major sources including Mauritius, the United States, the United Kingdom, the UAE, Cayman Islands, Germany, and Cyprus.
• Conversely, FDI inflows into India saw an increase from the Netherlands and Japan.
• Since the fiscal year 2018-19, Singapore has been the primary source of FDI for India. Before that, in 2017-18, Mauritius was the leading source.

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