A recent Securities and Exchange Board of India’s circular provided certain relaxations and demanded additional compliance requirements on overseas investments by Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs) registered with SEBI (AIFs and VCFs, collectively referred to as Funds), some of which are set out below:
* Requirement of Indian connection removed: In a welcome move, the limitation of the overseas investee companies having an Indian connection has now been removed. This will provide flexibility to Funds to diversify their overseas investment portfolio.
* Jurisdictional requirements: Funds are only permitted to invest in an overseas investee company incorporated in an IOSCO signatory or FATF compliant country. This aligns with the transparency and anti-money laundering standards being adopted globally and by India.
* Reinvestment of proceeds from liquidated investments allowed: If a Fund liquidates any previous investment made in an overseas investee company, the sale proceeds received from such liquidation, to the extent of principal amount invested, shall be available to all Funds (including the selling Fund) for reinvestment.
* Detailed application form for individual limits: SEBI’s application form for allocation of overseas investment limit set out in the Circular is more detailed and requires additional information by the Fund as well as undertakings to be provided by the manager and the trustee/board/designated partners of the Fund, respectively, in comparison to the earlier format provided in SEBI’s circular dated October 1, 2015.
Such additional information will provide SEBI greater visibility on the proposed overseas investment and the overseas investee company, fulfilment of basic compliances by the Fund, and any default in utilisation of the allocated limit, or sale or divestment of such overseas investment or the realisation/repatriation/
reinvestment of sale proceeds.
* Increased reporting obligation: The Fund concerned is required to furnish details of any sale/divestment of overseas investment in the prescribed format within three working days. Moreover, all Funds were required to report all the overseas investments divested until then, by September 16. This information will enable SEBI to keep track, on a near real-time basis, of the status of the overall limits, including on account of divestments (reinvestment).
The removal of the ‘Indian connection’ by the Circular addresses the long-standing industry demand.
While the RBI has not increased the overall limit at this time, the relaxation on reinvestment is expected to provide a much-needed relief to the Funds looking to invest overseas and whose applications were pending on account of the limit being exhausted.
The procedural changes are expected to provide SEBI the information to track the status of the limits and process the applications more efficiently. Moreover, these changes do not seem to have added excessive compliance burden on the Funds/managers.
The government and the RBI have notified a revised framework on overseas investment on August 22 (New OI Framework), whereby overseas investments by Funds are deemed to be portfolio investment.
SEBI may have to revise the Circular to align it with some of the changes made in the New OI Framework.
In addition, any clarity in relation to applicability of pricing guidelines and other restrictions set out in the New OI Framework on the overseas investments and divestments by Funds, would be much appreciated.
Badri Narayanan is Executive Partner; and Dayal is Partner at Lakshmikumaran & Sridharan Attorneys