Journalism of Courage
To boost entrepreneurship and prevent Indian firms shifting their businesses to foreign countries, Securities and Exchange Board of India (Sebi) on Thursday allowed alternative investment funds (AIFs) and venture capital funds (VCFs) to invest 25 per cent of their funds into foreign companies having an Indian connection.
Until now, India-based VCFs were restricted to invest only 10 per cent 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 the investors by requiring greater disclosures about the associates and managers of the 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 back end operations and/ or research and developments being undertaken in India.
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Representations made 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, stated the paper. “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 that 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 its prior approval.
In the case of AIFs, Sebi said that no separate permission from the 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 Foreign Direct Investment (FDI) under Overseas Direct Investment (ODI) 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 time limit from the date of approval from Sebi for making allocated investments in offshore venture capital undertakings. In case the applicant does not utilise the limits allocated within the stipulated period, the watchdog may allocate such unutilised limit to other applicants.
Will prevent firms shifting biz abroad
* Until now, India-based venture capital funds were restricted to invest only 10 per cent of their funds in Offshore Venture Capital Undertakings
* Alternative investment funds had no specific guidelines in place with regard to the quantum of such investments
* 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 back end operations and/ or research and developments being undertaken in India
