To boost Indian entrepreneurship and prevent them from shifting their businesses to foreign countries, Sebi on Thursday allowed Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs) to invest 25% of their funds in foreign companies having an Indian connection.
Until now, India-based VCFs could invest only 10% of their funds in Offshore Venture Capital Undertakings, while AIFs had no specific guidelines in place with regard to the quantum of such investments. Such entities include companies having a front office overseas, but back office operations in India.
Sebi said that AIFs can invest in equity and equity-linked instruments of offshore venture capital undertakings with Indian connection, subject to an overall limit of $500 million (combined limit for AIFs and VC Funds registered with Sebi).
The regulator has put necessary safeguards for investors by requiring greater disclosures about associates and managers of AIF.
Sebi had proposed to raise the limits in April-end after it received representations from the industry, indicating a major shift of Indian entrepreneurs outside India. Many Indian entrepreneurs were setting up their headquarters outside India with backend operations and/or R&D being undertaken in India.
Representations stated that an increase in investment would provide opportunities to the funds to generate better returns globally, in addition to generating indirect benefits to India by bringing in non-debt creating foreign capital resources, technology upgradation, skill enhancement, and new employment among other things.
“There was a need to allow higher overseas investment by VCFs,” Sebi had stated in its consultation paper in April.
As such investments are required to have an Indian connection, it is anticipated that they will generate indirect benefits to India through bringing in resources, technology upgradation, skill enhancement, new employment and spillovers, among others, Sebi said.
It said VCs and AIFs planning to make investments in offshore venture capital undertakings are required to submit their proposal for investment to the markets regulator for approval.
In case of AIFs, Sebi said that no separate permission from RBI is necessary in this regard.
VCFs and AIFs will not invest in joint venture/wholly owned subsidiary, while making overseas investments.
These funds will have to “adhere to Fema Regulations and other guidelines specified by RBI from time to time with respect to any structure which involves FDI under Overseas Direct Investment route”.
With regard to AIFs, Sebi said allocation of investment limits would be done on ‘first come first serve’ basis, depending on the availability in the overall limit of $500 million. In case an AIF, who is allocated certain investment limit, wishes to apply for allocation of further investment limit, the fresh application will have to be dealt with on the basis of the date of its receipt and no preference will be granted to it in fresh allocation of investment limit.
The AIF will have six months from the date of approval from Sebi to make allocated investments in offshore venture capital undertakings. In case the applicant does not utilise the limits allocated within the stipulated period, the markets watchdog may allocate such unutilised limit to other applicants.