India on Tuesday allowed foreign investors to buy up to a cumulative $10 billion in domestic equity funds, opening the door wider to capital flows into an expanding economy.

Qualified foreign investors, or QFIs, can also buy another $3 billion of debt funds that invest in at least 5-year infrastructure-related debt, the Securities and Exchange Board of India (SEBI) said.

The announcement followed Finance Minister Pranab Mukherjee's proposal in his annual budget in February to further liberalise foreign investments.

So far only foreign institutional investors (FIIs) and overseas Indians were allowed to buy units of domestic mutual funds. Foreign retail investors had to rely on emerging market or country specific overseas funds to take an exposure to India.

SEBI said QFIs can buy units of equity or debt funds in the primary market, but cannot trade in the secondary market.

The capital market regulator also said that when the cumulative QFI investment reaches $8 billion in equity schemes, SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice.

A similar process will be followed when the investment in debt hits $2.5 billion.

The QFI limit for debt will be within the overall ceiling of $25 billion, including FIIs, set by the central bank in corporate debt issued by infrastructure companies.

Total assets under management of all mutual funds in India stood at Rs 7.28 trillion ($161 billion) as at end-July, with equity funds comprising 23 per cent, data from the Association of Mutual Funds in India showed.

SEBI said QFIs can hold units in a demat account through a depository participant or via unit confirmation receipts that will require domestic mutual funds to open foreign currency accounts. 

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