Overseas investment by Alternative Investment Funds or Venture Capital Funds
The Securities and Exchange Board of India (“SEBI”) vide its circular dated August 17, 2022 (“Circular”) has issued guidelines for investment in overseas companies by Venture Capital Funds (“VCF”) and Alternative Investment Funds (“AIF”).
Under the SEBI (Alternative Investment Funds) Regulations, 2012 and the erstwhile SEBI (Venture Capital Funds) Regulations, 1996, VCF and AIFs are permitted to invest in the securities of entities incorporated outside India subject to taking approval and guidelines stipulated by SEBI and RBI, with an overall cap of USD 1,500 million. Through the Circular, SEBI has formalised the application process and taken further steps to liberalise the regime.
B. Conditions for investment
As per the Circular, SEBI has made the following changes:
1. AIFs/ VFCs shall file an application to SEBI for allocation of overseas investment limit as per the format prescribed under the Circular.
2. Earlier, AIF/VCF could invest in offshore entities having ‘Indian connection’ such as back-office operations of a company carried out in India with the front office being in an offshore jurisdiction. However, the requirement of overseas investee company to have ‘Indian connection’ has been done away with.
3. AIFs/ VFCs to invest in an overseas investee company which is incorporated in a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding or signatory to the bilateral Memorandum of Understanding with SEBI.
4. AIFs/ VFCs shall not invest in overseas investee company which is incorporated in a country identified in the public statement of Financial Action Task Force (“FATF”) as : (i) jurisdiction having anti-money laundering or combating financing of terrorism deficiencies; or (ii) jurisdiction which has not made sufficient progress in addressing the deficiencies or not committed to action plan developed by FATF.
5. If AIFs/VFC liquidates investment in 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 (including the selling AIF/VCF) for reinvestment. In other words, AIFs/VCFs need not obtain approval from SEBI for acquiring interest in portfolio companies in case of reinvestment. However, AIFs/VCFs have to furnish the sale/divestment details of overseas investment to SEBI in the prescribed format within 3 working days from the date of divestment in order to update the overall limit available for overseas investment by AIFs/VCFs.
6. AIFs/VCFs shall transfer or sell the investment in overseas investee company only to the entities eligible to make overseas investments.
7. All overseas investment sold or divested AIFs/VFC till date shall be reported to the SEBI within 30 days from the date of the Circular.
The erstwhile regulations restricted the scope of overseas investment. The said Circular is a welcome move as it enables easier execution of overseas investment by AIFs and VCFs. Further, it liberalises addressing the long-standing concerns of the industry for making overseas investment without requiring Indian connect. It enables AIFs and VCFs to go global and bring geographical diversity in investments. However, despite much anticipation, the overall limit of investment i.e., USD 1,500 million by AIFs/VCFs towards offshore companies has not been revised by SEBI and the revision in this segment is awaited.