Enhanced ODI Limits for AIFs and VCFs

By Simran Jalan (corplaw@vinodkothari.com)


The Securities and Exchange Board of India (SEBI) came out with a circular on July 3, 2018[1] (Circular) to liberalise the regulatory regime surrounding overseas investments by Alternative Investments Funds (AIF) and Venture Capitals Funds (VCF). However, before we delve further into the contents of the notification, let us have a quick discussion on what AIFs and VCFs are.

AIFs are privately pooled investment vehicles established in India and registered with the SEBI and is not a mutual fund or collective investment scheme. AIFs can be of following three categories –

  1. Category I – These funds invest only in early stage start-ups.
  2. Category II – Category II AIFs shall include AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements
  3. Category III – These include AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

VCFs, on the other hand, are a subset of AIFs, which invests primarily in unlisted securities of start-ups, emerging or early staged venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model. VCFs are categorised as Category I AIFs.

Changes effected through the Circular

As already noted that vide this Circular, the limit for overall overseas investment by AIFs in one financial year has been enhanced from USD 500 million to USD 750 million; thereby, opening up growth opportunities for the AIFs or VCFs registered in India.

Initially, the AIFs or VCFs were not allowed to make overseas investments, as the FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004 lacked any enabling provision in this regard. The situation changed after several representations from the industry. AIFs and VCFs were allowed to make overseas investments for the first time in October, 2015.

On October 1, 2015, the SEBI came out with a circular[2] permitting these vehicles to invest upto 25% of the investible funds in equity and equity linked instruments, only of offshore Venture Capital Undertaking with Indian connection, subject to an overall limit of $500 million. These vehicles were not allowed to invest in the form of JV or WOS outside India. This restriction remains intact under the new Circular as well.

Apart from the overall ceiling, all the other provisions of the 2015 Circular shall have to be complied. However, in addition to those, the AIFs or VCFs having overseas investment will also have to additional report the manner of the utilisation of overseas investment limits granted to them. The reporting requirement is as follows:

  1. Utilisation of limits – An AIF or VCF making overseas investment will have to report to the SEBI, within 5 working days from the date of utilisation of limits, i.e. the date of making the investments, regarding such utilisation on SEBI intermediary portal – https://siportal.sebi.gov.in/
  2. Non utilisation of limits – If an AIF or VCF fails to utilise the full or part of the permitted limit within a period of 6 months from the date of receiving the approval from SEBI or before the expiry of the validity period, it should report the same within 2 working days from the end of such period.
  3. Surrender of limits – If an AIF or VCF intends to surrender the limits allowed by the SEBI, it should report the same within 2 working days from the date of such decision to surrender.

Probable effects of the Circular

AIF regulations have evolved over a period of time and this has helped in bringing out standardized practices and better governance. Considering the increase in the number of AIFs in the last few years, the amount set under the earlier Circular, i.e. USD 500 million appeared to be too small. The increase in the overseas investment limit will surely provide for more opportunities to the AIFs and VCFs to generate better returns globally.

This increase in the limit has also increased the reporting requirements by the AIFs and VCFs. As per the circular, the investments are required to have an Indian connection. This will lead to generation of indirect benefits to India by bringing in resources, upgraded technology, new employment and others.

[1] https://www.sebi.gov.in/legal/circulars/jul-2018/overseas-investment-by-alternative-investment-funds-aifs-venture-capital-funds-vcfs-_39424.html

[2] https://www.sebi.gov.in/legal/circulars/oct-2015/guidelines-on-overseas-investments-and-other-issues-clarifications-for-aifs-vcfs_30772.html

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