BACKGROUND
- Vide circular dated 7 June 2024 (Circular), the Reserve Bank of India ('RBI') has introduced two important amendments related to investment under Overseas Portfolio Investment ('OPI') route. The position prior to introduction of this circular, amendments and its impact are explained below.
POSITION PRIOR TO RBI CIRCULAR1 DATED 7 JUNE 2024
- Regulation: Prior to introduction of the
Circular, the Foreign Exchange Management (Overseas Investment)
Directions, 2022 ('OI Directions') provided an option to
listed Indian companies and resident individuals to make investment
into overseas funds under OPI route, subject to fulfilment of the
following two conditions:
- Investment should be in 'units' of the overseas fund; and
- The overseas fund should be regulated in its home jurisdiction
- Concerns: As a result of the abovementioned
stipulation, the following challenges were faced by the investors:
- Investment in 'units': Many overseas funds are set-up as corporate bodies wherein shares / partnership interest is issued instead of 'units'. Therefore, there was an ambiguity whether investment in such entities is permitted under the OPI route.
- Investment in regulated overseas fund: Various overseas jurisdictions regulate the fund manager rather than the fund itself whereas the OI Directions provided that the overseas fund should be regulated in the home jurisdiction. As a result, there was an ambiguity whether investment could be made under OPI route in the overseas fund where the fund manager was regulated rather than the fund itself.
POSITION AFTER RBI CIRCULAR1 DATED 7 JUNE 2024
- Amendments: To address these issues and
provide clarity in view of the diverse regulatory framework
governing investment funds across various jurisdictions, the
Circular has introduced amendments in OI Directions which is
summarized below:
- Permissible Instruments: Investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an overseas investment fund, duly regulated by the regulator for the financial sectorin the host jurisdiction, shall be treated as OPI.
- Investment in regulated overseas fund: The regulated overseas investment funds shall include funds whose activities are regulated by financial sector regulator of the host country or jurisdiction through a fund manager.
AURTUS COMMENTS
- The amendments introduced by RBI are a welcome development. It will provide much needed clarity to investors to access a wider range of investment options.
- Pursuant to the amendments, OPI is no longer confined to investment in 'units' of offshore funds. The eligible investors would now be able to make investment under OPI route in offshore funds (including funds or vehicles set up in Gift City-IFSC) set up as Limited Partnerships, LLC, VCCs, companies, etc. Further, by permitting investments under OPI route in overseas funds regulated through their managers, the RBI has granted flexibility to the investors desirous of making investment in overseas jurisdictions which regulate the fund manager rather than the fund itself. For instance, pursuant to this amendment, the investors would be able to make investment in VCC funds in Singapore under OPI route.
- An issue which arises is regarding the position prior to 7 th June 2024 and whether the aforesaid Circular should be regarded as clarificatory in nature. A better view seems to be that since such Directions are issued under Section 11(1) of the Foreign Exchange Management Act, 1999 and are intended to secure compliance of the underlying Rules, Regulations, etc.; the intent of such Directions is merely to clarify the codified law. Hence, a better view seems to be that in the instant case, such Directions may be regarded as clarificatory in nature. However, readers are advised to consult their respective authorised dealers on this aspect.
Footnotes
1. A.P. (DIR Series) Circular No. 09 dated 7 June 2024
2. Paragraph 1(ix)(e) of the OI Directions
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.
