Sebi eases norms on AIF, VCF investments in overseas firms; drops India connection clause

Capital markets regulator Sebi has allowed India-registered Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs) to invest in foreign entities without having an India connection.

Earlier, one of the conditions was that such overseas investments were allowed only in those companies which had an Indian connection. Like, a company has a front office overseas, while having its back office operations in India.

"The requirement of the overseas investee company to have an Indian connection... Has been done away with," Sebi has said in a circular.

The regulator, however, said that no such investments can be made in companies based in jurisdictions identified by Financial Action Task Force (FATF) as those having anti-money laundering (AML) or combating the financing of terrorism (CFT) deficiencies.

Moreover, AIFs or VCFs will be allowed to invest in an overseas investee company, which is incorporated in a country whose securities market regulator is a signatory to the International

Organization of Securities Commission's (IOSCO) Multilateral Memorandum of Understanding or a signatory to the bilateral pact with Sebi.

These are part of the new guidelines issued by the Securities and Exchange Board of India (Sebi) for AIFs and VCFs that can invest abroad.

Commenting on the move, Karthik Reddy, Chairperson, IVCA and Co-founder & Managing Partner, Blume Ventures said, "we are pleased to see that Sebi is lending a kind ear to the industry's requests for more flexibility in a very dynamic global environment. ODI (offshore derivative instrument) for domestic venture capital funds has become an important need, to help Indian entrepreneurs compete with the best in the world."

He, further, said that the industry is eagerly looking forward to Sebi's request to RBI being approved, to reopen the ODI limit. "We are also hoping to see AIFs be allowed to utilize their ODI limits under automatic route, similar to mutual funds," he added.

As per the fresh guidelines, AIFs or VCFs will have to file an application before Sebi for allocation of overseas investment limit in the format.

"If an AIF/VCF liquidates investment made in an overseas investee company previously, the sale proceeds received from such liquidation, to the extent of investment made in the said overseas investee company, shall be available to all AIFs/VCFs for reinvestment," the regulator said.

Further, AIFs or VCFs will sell the investment in overseas investee companies only to the entities eligible to make overseas investments.

AIFs or VCFs will have to furnish the divestment details of the overseas investments to the capital markets regulator in a specified format within three working days for updating the overall limit available for overseas investment by these entities. Also, all the overseas investments sold/divested by them till date, will also be reported to Sebi within 30 days.

AIFs are funds for the purpose of pooling in capital from Indian and foreign investors for investing as per a pre-decided policy, while VCF is an AIF which invests primarily in unlisted securities of startups, early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model.