India: Alternate Investment Funds Can Invest Higher In Offshore Venture Capital Undertakings

Last Updated: 29 October 2015
Article by Agram Legal Consultants

In a move that will ensure better global returns to Indian investment funds, greater exposure to the international market practices and increased indirect benefits to the domestic market, SEBI has by a circular dated October 1, 2015, amended an earlier circular dated August 9, 2007, thereby increasing the percentage of permissible investments by venture capital funds ("VCFs") which were registered under the now repealed SEBI (Venture Capital Fund) Regulations, 1996 ("VCF Regulations"), in foreign companies whose shares are not listed on any of the recognized stock exchanges in India or abroad ("Offshore Venture Capital Undertakings"), from 10% (ten percent) to 25% (twenty five percent) of their investible funds.

The SEBI (VCF) Regulations, 1996 were replaced by the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations").

The RBI had, by its circulars dated April 30, 2007 and May 4, 2007 ("Earlier Circulars") permitted investment by VCFs in equity and equity-linked instruments of off-shore venture capital undertakings, subject to an overall limit of US$ 500,000,000 (United States Dollars Five hundred million) and SEBI regulations issued in this regard. Vide a circular dated December 9, 2014, RBI permitted alternative investment funds ("AIFs"), registered under and regulated by the AIF Regulations, 2012 to make such investments as prescribed under the Earlier Circulars. Under the abovementioned SEBI circular of October 1, 2015, AIFs can now invest up to 25% (twenty five percent) of their investible funds in Offshore Venture Capital Undertakings.

The overall limit of US$ 500,000,000 (United States Dollars Five hundred million) is a combined limit for AIFs registered under the AIF Regulations and VCFs registered under the VCF Regulations. Prior approval of SEBI is required for all such investments and the allocation of investment limits is done by SEBI, on a 'first come-first serve' basis, depending on the availability in the overall limit. A time limit of 6 (six) months from the date of approval from SEBI is give, for making the allocated investments.

Some of the conditions prescribed under the October 1, 2015 SEBI circular, for making investments in Offshore Venture Capital Undertakings are:

1. The Offshore Venture Capital Undertakings shall have an Indian connection, such as a company which has a front office overseas, while back office operations are in India;

2. The AIF / VCF shall not invest in a joint venture / wholly owned subsidiary while making overseas investments;

3. The AIF / VCF shall adhere to regulations under the Foreign Exchange Management Act, 2000 and other guidelines specified by RBI from time to time with respect to any structure which involves foreign direct investment under overseas direct investment route;

4. The AIF / VCF shall comply with all requirements under RBI guidelines on opening of branches / subsidiaries / joint venture / undertaking investment abroad by non- banking financial companies, where more than 50% (fifty percent) of the funds of the AIF / VCF has been contributed by a single NBFC.

This is a welcome move, given the high incidence of Indian entrepreneurs establishing their businesses outside India, with back end operations and branches in India. By allowing a higher quantum of the funds of VCFs and AIFs to be invested in overseas concerns of this nature, there is likely to be a positive spillover effect within the country.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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