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RBI Amends Directions on Overseas Portfolio Investment

Finsec Law Advisors

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Recently, the Reserve Bank of India (“RBI”), through a circular dated June 07, 2024 (“Circular”) has brought two key amendments to the Foreign Exchange Management (Overseas Investment) Directions, 2022 (“OI Directions”). The Circular attempts to liberalize investment in overseas funds by Indian corporates and resident individuals, by permitting investments in offshore funds managed by regulated fund managers in jurisdictions other than the International Financial Services Centre (“IFSC”) under the Overseas Portfolio Investment (“OPI”) route.

Prior to the amendment, Paragraph 1(ix)(e) of the OI Directions permitted OPI by resident individuals and listed entities when the OPI was made “only in the units” of an overseas fund. Further, such overseas funds must be regulated by the financial regulator of the concerned jurisdiction. Two major issues arose as a result of such restrictive language. Firstly, overseas funds are typically set up as corporate bodies issuing shares/stock or partnership interest, rather than as trusts issuing units. The earlier framework, effectively restricted the access that residential individuals and listed entities would have to these funds, by restricting subscription to only units. Subscription to other types of instruments that may be issued by an overseas fund was not contemplated. Secondly, in jurisdictions such as the United States of America and Singapore, the fund managers are regulated instead of the fund itself, therefore Indian investments via the OPI route was not possible in these funds. Incidentally, this practice was also inconsistent with the regulatory framework governing funds in GIFT City, where the fund manager is the regulated entity and not the fund.

The latest amendment to the OI Directions aims to address this inconsistency by allowing resident individuals and listed entities to invest in not only units of the fund but also in other instruments issued by the fund, thereby opening the doors for investment in funds situated in Singapore and Delaware. The extension of this amendment to IFSC’s has now permitted listed companies, unlisted entities and resident individuals to subscribe to units or any other instruments that may be issued by a fund located in an IFSC. Additionally, the requirement of the fund being directly regulated by the financial regulator of the concerned jurisdiction has been modified to include funds that are regulated through their managers, thus bringing the framework in line with global practice.

Furthermore, there is now a unique flexibility with respect to legal structure of the funds where general partners now have the freedom to establish funds in commercially favourable jurisdictions in various forms like limited partnerships, Limited Liability Company (LLCs), Variable Capital Company (VCCs), corporations etc. The Circular is a step in the right direction as it synchronizes the OI Directions with various fund structures abroad. This is projected to expand opportunities and give a major boost to overseas investments by Indian entities.

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