7 Charting the Course: A Comprehensive Guide to Overseas Investment Norms for Alternative Investment Funds

Key Takeaways:

- AIFs can invest up to 25% of their investable funds in equity and equity-linked instruments of offshore venture capital undertakings, subject to a combined limit of $1.5 billion.

- Investments are allowed only in companies incorporated in countries whose securities regulators have signed the IOSCO Multilateral Memorandum of Understanding or have a bilateral MoU with SEBI.

- AIFs must comply with Foreign Exchange Management (Overseas Investment) Regulations, 2022, and related RBI directions while making overseas investments.

- SEBI allocates overseas investment limits to AIFs on a first-come, first-served basis, and AIFs have four months to utilize the allocated limits.

- AIFs must report the utilization of overseas limits, divestment details, and any unutilized limits to SEBI within specified timelines.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has established a comprehensive framework to govern overseas investments by Alternative Investment Funds (AIFs). This framework aims to facilitate global investment opportunities for AIFs while ensuring transparency, investor protection, and compliance with relevant regulations.

Under the SEBI guidelines, AIFs are permitted to invest in equity and equity-linked instruments of offshore venture capital undertakings, subject to certain conditions. An offshore venture capital undertaking is defined as a foreign company whose shares are not listed on any recognized stock exchange in India or abroad.

The investment conditions stipulate that AIFs can invest up to 25% of their investable funds in such offshore undertakings, subject to an overall combined limit of $1.5 billion for AIFs and Venture Capital Funds registered under the erstwhile Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996.

Furthermore, AIFs can only invest in overseas investee companies incorporated in countries whose securities market regulators are signatories to the International Organization of Securities Commission's Multilateral Memorandum of Understanding (Appendix A Signatories) or have a bilateral Memorandum of Understanding with SEBI. This condition ensures regulatory cooperation and oversight in the jurisdictions where AIFs invest.

AIFs are prohibited from investing in overseas investee companies incorporated in countries identified by the Financial Action Task Force (FATF) as having strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies, or countries that have not made sufficient progress in addressing such deficiencies or committed to an action plan developed with FATF.

These overseas investments by AIFs are subject to the Foreign Exchange Management (Overseas Investment) Regulations, 2022, including amendments and related directions issued by the Reserve Bank of India (RBI) from time to time. AIFs must adhere to FEMA, 1999, its rules, regulations, and directions issued by the Government/RBI.

To ensure compliance with RBI guidelines, AIFs must comply with all requirements related to opening branches, subsidiaries, joint ventures, or undertaking investments abroad by Non-Banking Financial Companies (NBFCs), where more than 50% of the funds of the AIF have been contributed by a single NBFC.

When transferring or selling investments in overseas investee companies, AIFs must ensure that the entity acquiring the investment is eligible to make overseas investments under the extant FEMA guidelines.

AIFs seeking to invest overseas must file an application with SEBI for the allocation of overseas investment limits in a specified format, along with an undertaking from the Trustee/Board/Designated Partners of the AIF. SEBI allocates investment limits on a first-come, first-served basis, depending on the availability within the overall limit of $1.5 billion.

If an AIF wishes to apply for additional investment limits, the fresh application will be dealt with based on the date of receipt, without any preference given to the AIF's previous allocations.

AIFs have a time limit of four months from the date of SEBI's approval to utilize the allocated investment limits. If an AIF fails to utilize the limits within the stipulated period, SEBI may reallocate the unutilized limits to other applicants.

In the event that an AIF liquidates its investment in an overseas investee company, the sale proceeds received, to the extent of the investment made in that company, shall be available for reinvestment by all AIFs, including the selling AIF.

AIFs are required to report the utilization of overseas limits within five working days of such utilization through the SEBI intermediary portal. They must also report any unutilized limits, decisions to surrender limits, and divestment details within specified timelines to SEBI, either through the intermediary portal or by emailing the designated address.

By adhering to these guidelines, AIFs can navigate the overseas investment landscape while maintaining transparency, regulatory compliance, and investor protection. SEBI's framework ensures that AIFs have access to global investment opportunities while operating within a well-defined regulatory framework.

FAQs:

Q1: What is the maximum limit for AIFs to invest in offshore venture capital undertakings?

A1: AIFs can invest up to 25% of their investable funds in equity and equity-linked instruments of offshore venture capital undertakings, subject to an overall combined limit of $1.5 billion for AIFs and Venture Capital Funds registered under the erstwhile Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996.

Q2: Can AIFs invest in any overseas company?

A2: No, AIFs can only invest in overseas investee companies incorporated in countries whose securities market regulators are signatories to the IOSCO Multilateral Memorandum of Understanding (Appendix A Signatories) or have a bilateral Memorandum of Understanding with SEBI. Additionally, AIFs cannot invest in companies incorporated in countries identified by the FATF as having strategic AML/CFT deficiencies or not making sufficient progress in addressing such deficiencies.

Q3: How do AIFs obtain overseas investment limits?

A3: AIFs must file an application with SEBI for the allocation of overseas investment limits, along with an undertaking from the Trustee/Board/Designated Partners of the AIF. SEBI allocates investment limits on a first-come, first-served basis, depending on the availability within the overall limit of $1.5 billion.

Q4: What is the time limit for AIFs to utilize the allocated overseas investment limits?

A4: AIFs have a time limit of four months from the date of SEBI's approval to utilize the allocated investment limits. If an AIF fails to utilize the limits within this period, SEBI may reallocate the unutilized limits to other applicants.

Q5: What are the reporting requirements for AIFs regarding overseas investments?

A5: AIFs must report the utilization of overseas limits within five working days of such utilization through the SEBI intermediary portal. They must also report any unutilized limits, decisions to surrender limits, and divestment details within specified timelines to SEBI, either through the intermediary portal or by emailing the designated address.

Key Precedents:

1. SEBI Circular No. SEBI/HO/AFD-1/PoD/CIR/P/2022/108 dated August 17, 2022:

This circular outlines the guidelines for overseas investments by AIFs and related reporting requirements. It covers investment conditions, allocation of overseas investment limits, and reporting obligations.

2. SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2018/103/2018 dated July 03, 2018:

This circular provides guidance on the investment conditions for AIFs investing in offshore venture capital undertakings, including the definition of such undertakings and the maximum investment limit.

3. SEBI Circular No. CIR/IMD/DF/7/2015 dated October 1, 2015:

This circular addresses the investment conditions for AIFs investing in offshore venture capital undertakings, specifically the requirement to invest in companies incorporated in countries whose securities regulators have signed the IOSCO Multilateral Memorandum of Understanding or have a bilateral MoU with SEBI.

4. Foreign Exchange Management (Overseas Investment) Regulations, 2022:

These regulations, issued by the Reserve Bank of India (RBI), govern the overseas investment activities of AIFs. AIFs must comply with these regulations, including any amendments and related directions issued by the RBI from time to time.

5. SEBI Circular No. SEBI/HO/AFD/PoD/CIR/P/2023/137 dated August 04, 2023:

This circular clarifies that AIFs have a time limit of four months from the date of SEBI's approval to utilize the allocated overseas investment limits.

The SEBI guidelines for overseas investments by AIFs draw upon these key precedents to establish a comprehensive framework that balances investment opportunities with regulatory oversight and investor protection. By adhering to these guidelines and the relevant circulars, notifications, and regulations, AIFs can navigate the global investment landscape while maintaining transparency and compliance.

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Here's AIF Master Circular's verbatim Chapter 7.

Chapter 7 - Guidelines for overseas investments bv AIFs and related reporting{25}

In terms of Regulation 15(1)(a) of AIF Regulations, AIFs may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the RBI and SEBI from time to time. In this regard, the following is specified:

7.1. Investment conditions

7.1.1. AIFs may invest in equity and equity linked instruments only of off-shore venture capital undertakings, subject to overall limit of USD 1500 million (combined limit for AIFs and Venture Capital Funds registered under the erstwhile Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996).

7.1.2. For the purpose of such investment, it is clarified that “Offshore Venture Capital Undertakings” means a foreign company whose shares are not listed on any of the recognized stock exchange in India or abroad.

7.1.3. Such investments shall not exceed 25% of the investable funds of the scheme of the AIF.

7.1.4. AIFs shall invest in an overseas investee company, which is incorporated in a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to the bilateral Memorandum of Understanding with SEBI.

7.1.5. AIFs shall not invest in an overseas investee company, which is incorporated in a country identified in the public statement of Financial Action Task Force (FATF) as:

(i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

(ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with FATF to address the deficiencies.

7.1.6. These investments would be subject to Foreign Exchange Management (Overseas Investment) Regulations, 2022, including amendments thereof and related directions issued by RBI from time to time.

7.1.7. AIFs shall not invest in Joint venture/Wholly Owned Subsidiary while making overseas investments.

7.1.8. AIFs shall adhere to FEMA, 1999, its Rules, Regulations and Directions issued by the Government/ RBI from time to time.

7.1.9. AIFs shall comply with all requirements under RBI guidelines on opening of branches/subsidiaries/Joint Venture /undertaking investment abroad by NBFCs, where more than 50% of the funds of the AIF has been contributed by a single NBFC.

7.1.10. AIFs shall transfer/sell the investment in overseas investee company only to the entities eligible to make overseas investments, as per the extant guidelines issued under the FEMA, 1999.

7.2. Allocation of overseas investment limit

7.2.1. AIFs shall file an application to SEBI for allocation of overseas investment limit in the format specified at Annexure 6. The Trustee/Board/Designated Partners of the AIFs shall submit an undertaking to SEBI as specified at Annexure 6 with respect to the proposed overseas investment. It is clarified that no separate permission from RBI is necessary in this regard.

7.2.2. The allocation of investment limits would be done on ‘first come- first serve’ basis, depending on the availability in the overall limit of USD 1500 million.

7.2.3. In case an AIF who is allocated certain investment limit, wishes to apply for allocation of further investment limit, the fresh application shall be dealt with on the basis of the date of its receipt and no preference shall be granted to it in fresh allocation of investment limit.

7.2.4. The AIF shall have a time limit of four{26} months from the date of approval from SEBI for making allocated investments in offshore venture capital undertakings. In case the applicant does not utilize the limits allocated within the stipulated period, SEBI may allocate such unutilized limit to other applicants.

7.2.5. If an AIF liquidates investment made in an 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 (including the selling AIF) for reinvestment.

7.3. Reporting of overseas investments

7.3.1. AIFs shall report the utilization of the overseas limits within 5 working days of such utilization on SEBI intermediary portal at https://siportal.sebi.gov.in.

7.3.2. AIFs shall also report the following through SEBI intermediary portal:

(i) In case an AIF has not utilized the overseas limit granted to them within a period of four months27 from the date of SEBI approval (hereinafter referred to as ‘validity period’), the same shall be reported within 2 working days after expiry of the validity period;

(ii) In case an AIF has not utilized a part of the overseas limit within the validity period, the same shall be reported within 2 working days after expiry of the validity period;

(iii) In case an AIF/ VCF wishes to surrender the overseas limit at any point of time within the validity period, the same shall be reported within 2 working days from the date of decision to surrender the limit.

7.3.3. AIFs shall furnish the sale/divestment details of the overseas investments to SEBI in the format given at Annexure 7 within 3 working days of the divestment, by emailing to aifreporting@sebi.gov.in, for updating the overall limit available for overseas investment by AIFs.

Note:-

{25}SEBI Circular No. SEBI/HO/AFD-1/PoD/CIR/P/2022/108 dated August 17, 2022, SEBI Circular No. SEBI/H0/IMD/DF1/CIR/P/2018/103/2018 dated July 03, 2018 and SEBI Circular No. CIR/IMD/DF/7/2015 dated October 1, 2015

{26}SEBI circular no. SEBI/HO/AFD/PoD/CIR/P/2023/137 dated August 04, 2023

{27}SEBI circular no. SEBI/H0/AFD/POD/CIR/P/2023/137 dated August 04, 2023