SEBI Drops 'Indian Connection' Hurdle For AIFs' Overseas Investments

Pooled vehicles, such as Alternative Investment Funds and Venture Capital Funds, have been given more leeway by SEBI to invest in foreign companies.

The market regulator has done away with the condition which mandated an “India connection” of the overseas entity in which the AIF and VCF was investing.

If overseas companies wanted Indian AIF capital, they were required to show an “India connection” by way of a subsidiary or some operations, Nandini Pathak, leader in funds practice at Nishith Desai Associates, said.

It came to a point that the regulator was most quickly satisfied with an "India connection" if the overseas company had a subsidiary in India, Pathak said.

From the perspective of an AIF, it's looking to make gains for its investor, but the regulator's thought process was that there has to be some tangible benefit for the Indian economy when domestic capital is being deployed overseas, Swapneil Akut, counsel at S&R Associates, said.

There was a disconnect since it limited the investment options of an AIF, he said.

Of course, this relief has come with some safeguards, namely the overseas company must be in a jurisdiction whose market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum, or has a bilateral Memorandum of Understanding with SEBI.

Further, no investment can be made in companies located in Financial Action Task Force non-compliant jurisdictions.

The second relief has to do with making the overall limit for AIF/VCF investment more relevant. Currently, at an industry level, such pooled vehicles have a collective limit of $1,500 million for overseas investment.

SEBI has now said that if an AIF/VCF exits from an overseas investment, the window that’s been freed up will be available to all the players, including the AIF that’s divested.

By way of illustration, if AIF ‘X’ divests $5 million of an existing investment, all AIFs/VCFs, including 'X', can reinvest to this extent after regulatory approval.

Pathak explained how this might work.

If $1,500 million is the industry bandwidth and somebody has exited $2 million, then fresh approval can be taken to invest this much amount, Pathak said. So far, the regulator was making available the bandwidth if, let’s say, an AIF had got the approval and not invested the amount. Now, it has said that upon exits, too, the bandwidth will be made available to all players, she added.

The idea is to get more real-time information on how much capital has been deployed, and how much has been divested, Akut said.

The divestment details have to be given to SEBI within three days. Further, all the overseas investments sold/divested by AIFs or VCFs till date also need to be reported to SEBI within 30 days, the circular said.

So far, no real-time reporting happened for exits, which meant that the ceiling for the industry was not being dynamically used, Akut said.