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Overseas Investments by AIFs/VCFs

Finsec Law Advisors

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SEBI recently issued a circular on the “Guidelines on overseas investments and other issues/clarifications for AIFs/VCFs” which allows Venture Capital Funds to invest upto 25% of their investible funds in Offshore Venture Capital Undertakings. The Alternative Investment Funds have been permitted to invest upto 25% of the investible funds in equity and equity linked instruments only of offshore VCUs, subject to an overall limit of USD 500 million, which is a combined limit for AIFs and registered VCFs. An offshore VCU means a foreign company whose shares are not listed on any recognized stock exchange in India or abroad. Further, investments are allowed only in those companies which have an Indian connection, for instance a company having its front office overseas and back office operations in India.

As per the circular, AIFs and VCFs are required to take prior approval from SEBI for making investments in offshore VCUs and would not need a separate approval from RBI. Further, VCFs and AIFs have to comply with FEMA Regulations and other applicable RBI guidelines with respect to any structure which involves FDI under the ODI route. The circular also clarifies that the tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme, and prescribes certain obligations for managers, trustee and sponsor of the AIF, in light of investor protection.

The circular states that the investment limits would be allocated on a first-come-first-serve-basis, depending on the availability of the overall limit of USD 500 million. The said cap is very low, given that it is a consolidated upper limit for all registered AIFs and VCFs. Further, given that investment by AIFs in off-shore VCUs would tantamount to a foreign exchange transaction, the appropriate regulatory authority for granting any approval would be RBI.

While the circular seeks to broaden the investment opportunities available for AIFs/VCFs, there may be certain issues which may hinder local AIFs in diversifying their portfolio and becoming global funds. The strategy and scope of investments by AIFs is much broader than erstwhile VCFs they not only encompass VCFs but also include other kinds of funds such as SME funds, social sector funds, infrastructure funds, PE funds, debt funds, hedge funds etc. Therefore, their investments should not be restricted to merely equity and equity linked instruments.