Regulatory Update: RBI relaxes norms for overseas investments in offshore funds

Recently, the Reserve Bank of India (RBI) issued a circular amending the Foreign Exchange Management (Overseas Investment) Directions, 2022 (OI Directions) with respect to investment in overseas funds (Circular). The OI Directions along with the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules), the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (OI Regulations) comprise of the legal framework regulating investment outside India (collectively OI Framework).

The OI Rules provide that all investments in overseas unlisted entities will be treated as overseas direct investment (ODI). Additionally, in terms of the OI Rules, individuals are not permitted to make ODI in the financial services sector, thereby restricting individuals from making investments in funds outside India. However, the OI Directions allow listed Indian companies and persons resident in India to make overseas portfolio investments (OPI) in overseas funds. Prior to the issuance of the Circular, OPI by listed Indian entities and resident Indians in overseas funds was allowed basis two conditions:

• OPI is made in ‘units’ of overseas funds; and
• The funds are duly regulated by the financial services regulator of the host jurisdiction.

To address industry concerns arising due to different regulatory framework with respect to overseas investment, RBI has introduced the following relaxations:

• In addition to OPI in units issued by an overseas fund, OPI may be made in ‘any other instrument (by whatever name called)’ issued by an overseas fund;
• An explanation has been included to clarify that duly regulated overseas investment funds include funds whose activities are regulated through a fund manager.

The Circular increases investment opportunities in overseas jurisdictions having a fund structure as a partnership entity or a company, or where the fund entity itself is not regulated but the fund manager is regulated under the laws of the host jurisdiction.

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