SEBI – Relaxations for overseas investments by AIFs and VCFs

The Securities and Exchange Board of India (SEBI) vide a circular dated 17 August 2022 (Circular) has relaxed the guidelines in relation to overseas investments by Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs). The Circular can be found here.

Pursuant to the Circular, AIFs and VCFs may invest up to 25% of their respective investable funds in offshore venture capital undertakings without the erstwhile pre-requisite of such undertakings having an Indian connection. However, the securities market regulators of the countries in which these undertakings are incorporated must be signatories to either the International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a bilateral Memorandum of Understanding with SEBI.

Further, the investee entities must not be incorporated in countries that have been identified by the Financial Action Task Force (FATF) as having strategic deficiencies in anti-money laundering or combating terrorism financing, or countries that have not made sufficient progress in addressing such deficiencies. While the overall cap of overseas investment for all AIFs and VCFs has not been extended beyond USD 1500 million, the Circular provides that sale proceeds from divestment of overseas investments (to the extent of the original investment) shall be eligible for reinvestment, effectively increasing the overall cap.

The Circular has also mandated AIFs and VCFs to furnish the details of any future divestments within 3 days from such divestment, whereas all divestments prior to the date of the Circular are to be reported to SEBI by 27 September 2022.The Circular also prescribes a new format for the application required to be filed with SEBI for allocation of overseas investment limit to AIFs and VCFs.

Our thoughts

These guidelines by SEBI are a welcome step in keeping up with the global dynamic environment. The Circular has struck the balance in giving the AIFs and VCFs flexibility to invest in more entities while retaining certain limitations to ensure that funds are not invested in furtherance of terrorist financing or other such fringe elements. These guidelines have set the stage for an increase in overseas direct investments and efficiently managing such investments.

Authors: Souvik Ganguly

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