SEBI enhanced the industry-wide investment limit for foreign investments by an Alternative Investment Fund to USD 1, 500 million from USD 750 million in its latest circular No. SEBI/HO/IMD/DF6/CIR/P/2021/565 dated May 21, 2021 in an effort to boost the AIF business.
The SEBI (Alternative Investment Funds) Regulations, 2012 ("Regulations") govern alternative investment money established in India for the private placement of funds. AIFs are allowed to invest in securities of firms incorporated outside of India, subject to the RBI and SEBI's conditions and guidelines. Before the Circular was issued, one such limitation for overseas investment was that the maximum allowable block limit ("Block Limit") for overseas investment by all SEBI registered AIFs and VCFs should not exceed USD 750 million. SEBI increased the Block Limit to USD 1,500 million through a Circular. Before the Circular was issued, one such limitation for overseas investment was that the maximum allowable block limit ("Block Limit") for overseas investment by all SEBI registered AIFs and VCFs should not exceed USD 750 million. SEBI increased the Block Limit to USD 1,500 million through a Circular.
FRAMEWORK FOR AIF AND VCF OVERSEAS INVESTMENT
The legal framework under which AIFs and VCFs invest overseas is provided by the SEBI circulars of July 03, 20183 ("2018 Circular") and October 01, 20154 ("2015 Circular"). The following is a synopsis of this framework.
The investment limit for AIFs and VCFs is granted on a first-come, first-served basis, based on Block Limit availability.
In addition to the Block Limit for all SEBI-registered AIFs and VCFs, the 2015 Circular stipulates that no more than 25% of an AIF's investible funds may be invested outside of India.
AIFs can only engage in equity and equity-linked securities of offshore venture capital firms. The phrase "offshore venture capital undertakings" is defined in the 2015 Circular as a foreign firm whose shares are not listed on any recognised stock exchange in India or elsewhere. AIFs are not permitted to participate in joint ventures or totally owned subsidiaries in other countries. AIFs and VCFs may invest overseas only in firms with which they have established some sort of Indian relationship in order to generate indirect benefits for India. In its 2015 Circular, SEBI defined 'Indian connection' as scenarios in which a company's back office operations are carried out in India but the front office is located in an offshore jurisdiction. SEBI, on the other hand, does not give a complete definition of 'Indian connection,' and therefore examines each application on a case-by-case basis to decide whether the applicant has an India connection (See Procedure for Approval below).
Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, including revisions and associated directives issued by the RBI from time to time, apply to AIFs and VCFs' overseas investments. Such AIFs and VCFs must also ensure that any structure including the Overseas Direct Investment (ODI) route complies with any additional foreign exchange management requirements and RBI instructions that may be issued from time to time.
AIFs and VCFs interested in making an overseas investment must submit a proposal to SEBI for approval prior to doing so. As an Annexure to the 2015 Circular, the format for the said proposal has been established. AIFs can now apply for such funding via the internet. Such international investments do not require separate RBI authorisation. AIFs and/or VCFs that have already been given a particular amount of foreign investment limit by SEBI have the option of seeking for more investment limits by submitting a new application. However, such AIFs and/or VCFs will not be given any special consideration when it comes to the new allocation.
Following receipt of SEBI clearance, the concerned AIF or VCF is expected to make allocated investments in overseas investee entities within six months of receiving such approval. SEBI has the authority to distribute the unutilized limit to other applicants if the given limit is not used within the specified time frame.
REQUIREMENTS FOR PUBLIC DISCLOSURE
AIFs and VCFs are required to notify the use of overseas limitations on the SEBI intermediary site within 5 working days after the use. If an AIF or a VCF fails to use the allowed overseas limit or a portion of it within the six-month time period, the failure must be reported to the SEBI within two working days of the validity period expiring. If an AIF or a VCF decides to resign its overseas limit, it must notify SEBI within two working days of the decision to surrender the limit. These notification requirements are intended to make it easier to track how overseas investment limitations authorised by the government are being used.
FEEDBACK FROM THE INDUSTRY
The previous ceiling was approaching exhaustion, and there was a general sense of increased necessity among the many AIFs in the business, so this Circular is a welcome move.
Additional steps SEBI could take to make it easier for AIFs and VCFs to execute overseas investments include providing additional guidelines for determining the term'India connection,' as well as expanding the scope of overseas investments from 'companies' to other common corporate structures prevailing overseas, such as 'limited partnerships.' A clarification from SEBI on the approval deadlines would also be helpful to fund managers in evaluating investment options.