SEBI RATIONALISES
OVERSEAS INVESTMENT
GUIDELINES FOR AIFs AND VCFs
SEBI,
by way of a circular on August 17, 2022 (“Circular”), issued new
guidelines for investments by Alternative Investment Funds (“AIFs”) and
Venture Capital Funds (“VCFs”) in securities of companies set up
overseas.[1] This Circular introduces significant changes
to the overseas investment framework for AIFs and VCFs, including a more
prescriptive application process for allocation of overseas investment limits
and, most importantly, foregoing the requirement for overseas investee
companies to have an Indian connection to receive investments from AIFs and
VCFs.
Background:
This
update discusses the principal changes to the overseas investment framework
introduced by the Circular and the key takeaways from it. It is important to
note that the Circular does not replace the prior guidelines issued on this
topic, which continue to remain in place except to the extent modified by the
Circular. In addition, AIFs/VCFs will also need to comply with the requirements
of the Foreign Exchange Management Act, 1999 and the regulations thereunder, in
relation to their overseas investments.
The New Guidelines:
Introduction of a detailed application form for allocation
of overseas investment limit
Pursuant
to the Circular, SEBI has prescribed a new format for AIFs and VCFs to apply
for the allocation of overseas investment limit, which is much more detailed
than the format under the prior guidelines. Under the new format, AIFs and VCFs
are required to make this application for each proposed overseas investment and
must furnish details of the overseas investment such as:
(i)
particulars of the AIF/VCF and the
overseas investee company, details of investment including type of investment,
amount proposed to be invested and previously invested, and investible corpus
of the scheme in AIF/VCF.
(ii)
details of the overseas investments
made by the scheme in the past such as particulars of the investee company,
amount allocated by SEBI, amount invested, if the investment has been sold,
among others.
(iii)
undertakings by the
trustee/board/designated partners and manager of the AIF/VCF, which are, again,
more detailed than the declarations and undertakings previously required.
Doing away with the requirement of having an Indian
connection
The
most significant change introduced by the Circular is to forego the requirement
for AIFs and VCFs to invest only in overseas companies that have an “Indian
connection”. Under the new guidelines,
the only eligibility criteria for investee companies is that they must be:
(i)
incorporated in a country that is a
signatory to the International Organization of Securities
Commission’s Multilateral
MOU or a signatory to the bilateral MOU with SEBI; and
(ii)
not incorporated in a country
identified by the Financial Action Task Force (“FATF”) as a jurisdiction
having strategic anti-money laundering or combating financing of terrorism
deficiencies to which counter measures apply or a jurisdiction which has not
made sufficient progress in addressing the deficiencies nor has committed to an
action plan developed with FATF addressing the deficiencies.
Reinvestment of divested funds
Under
the prior guidelines, if an AIF who has been allocated a certain investment
limit wished to apply for allocation of further investment limit, the AIF was
required to make a fresh application to SEBI for such fresh allocation. The
allocation of the investment limit was on a ‘first come first serve’ basis
subject to availability within the overall limit of US$1500 million. Pursuant to the Circular, SEBI has permitted
AIFs and VCFs to reinvest the proceeds received from the liquidation of a
previous investment.
SEBI
has introduced a requirement for AIFs and VCFs to submit the details of
divestment and sale of overseas investment to SEBI in a prescribed form within
3 (Three) working days of the sale or divestments in order to enable SEBI to
update the overall limit available to AIFs and VCFs for overseas investment.
In
the same form, SEBI also requires AIFs and VCFs to furnish all details of the
sale or divestments of overseas investments made till date within 30 (Thirty)
days of the date of the Circular, i.e., on or prior to September 16, 2022.
Key Takeaways
The
new guidelines are a welcome change as they provide greater flexibility for
AIFs and VCFs in their overseas investment strategies.
By
not restricting the scope of overseas investments to only those companies with
an Indian connection, SEBI has widened the types of companies in which AIFs and
VCFs can invest. This change is likely to facilitate AIFs and VCFs to invest in
new-age companies such as cryptocurrency companies and Web3 companies whose
Indian connection was previously not possible to be shown. Further, the new
guidelines are likely to streamline the application process for overseas
investment limits by allowing the proceeds from the sale of a prior investment
to be reinvested in a new overseas company without the requirement for further
SEBI approval, thereby also maintaining a larger pool to allocate investment
limits without breaching the overall limit.
Despite these positive changes,
one bone of contention in AIF and VCF circles has been, SEBI’s failure to
increase the overall limit of US$1,500 million for overseas investments. SEBI,
by way of a circular in May 2021, had doubled the overall limit for overseas
investments from US$750 million to US$1,500 million.[1]
However, even this revised limit has been considered inadequate in light of the
rapid growth of the AIF industry in recent years. As the existing limit is now
close to being reached, it remains to be seen if SEBI will heed calls to
increase the overall limit once again. In the meantime, the ability to reinvest
divestment proceeds in another overseas investee company may provide some
limited breathing room for AIFs and VCFs.
[1] https://www.sebi.gov.in/legal/circulars/aug-2022/guidelines-for-overseas-investment-by-alternative-investment-funds-aifs-venture-capital-funds-vcfs-_62020.html
[2] https://www.sebi.gov.in/legal/regulations/jul-2022/securities-and-exchange-board-of-india-alternative-investment-funds-regulations-2012-last-amended-on-july-25-2022-_61452.html
[3] https://www.sebi.gov.in/legal/circulars/aug-2007/guidelines-for-overseas-investments-by-venture-capital-funds_8308.html