Sebi liberalised overseas investment norms for VCFs and AIFs, but left the overall cap for the ecosystem untouched
The capital markets regulator, Sebi, issued a circular on October 1, 2015 on overseas investments by domestic venture capital funds (VCFs) and alternative investment funds (AIFs).
This column analyses the important changes that have been brought about by the circular. First, the circular liberalises the policy concerning overseas investments by VCFs in offshore venture capital undertakings (OVCUs) and second, it permits AIFs to undertake investments into OVCUs, subject to permission of Sebi.
Since 2007, Sebi (and RBI) allowed VCFs to invest up to only 10% of their investable funds in OVCUs. Sebi’s position regarding overseas investments by AIFs and the permissible quantum of investments, however, were not specifically laid down. (RBI in December 2014 allowed AIFs to undertake overseas investments.)
As per the circular, a VCF can, now, invest up to 25% of its investible funds in equity and equity-linked instruments of an OVCU. The circular reiterates the regulatory position that such overseas investments are only permitted in those OVCUs that have an Indian connection (e.g. companies with front offices abroad, while having back office operations in India).
As regards AIFs, the circular adopts a stance similar to that of VCFs, whereby an AIF is allowed to invest in equity and equity-linked instruments of OVCUs, subject to such investments not exceeding 25% of its investible funds. Further, the investment is only permitted in those OVCUs which have an Indian connection.
The circular rightly points out that such investments would provide opportunities to the funds to generate better returns globally, getting exposure to the international markets practices, etc, and would also bring about technology upgradation, skill enhancement and employment opportunities in India.
While the policy liberalisation by Sebi is definitely a step in the right direction, one in which Sebi has paid attention to the demands raised by VCFs seeking greater flexibility in undertaking overseas investments, there appears to be one critical area which missed the attention of the capital markets regulator. In what could be a dampener, overseas investment by all AIFs/VCFs can be up to $500 million, which is a combined limit of investment for all AIFs and VCFs. Further, Sebi is empowered to determine the individual allocation limit (from the available corpus of $500 million) up to which VCFs/AIFs can be allowed to invest.
The $500-million limit has been in place since 2007 (when Sebi and RBI had initially allowed VCFs to undertake overseas investments). Looking at the said limit in the context of 2015 (with a substantial increase in the number of VCFs and AIFs), it can be argued that Sebi could have undertaken a deeper look into the issue and could have enhanced the limit to a figure more in line with current market trends.
Further, both VCFs and AIFs are permitted to undertake investments through only equity and equity-linked instruments. AIFs can have a plethora of classifications, ranging from social sector funds to infrastructure funds to hedge funds, etc, and, therefore, the scope of investments by any AIF is much wider than that of a VCF. Hence, from the perspective of AIFs the limitation on instruments of undertaking investment can be another factor curtailing the opportunities available to AIFs abroad.
While the responses to these limitations are yet to be sounded out in public, there remains a question as to whether Sebi will issue any amendments to the Circular, and if so, when will it find light of the day? Could the change really become a missed opportunity?
CV Srikant contributed to the article
The author is partner, J Sagar
Associates, Advocates and Solicitors. Views are personal