Guidelines for overseas investments by AIFs and related reporting
Chapter 5 - Guidelines for overseas investments by AIFs and related reporting
Regulation 15(1)(a) of the AIF Regulations permits AIFs to invest in securities of companies incorporated outside India.
Such overseas investments are subject to the conditions and guidelines prescribed by RBI and SEBI.
RBI and SEBI may prescribe such conditions or guidelines from time to time.
Therefore, AIFs making overseas investments must comply with the applicable requirements issued by both RBI and SEBI.
5.1. Investment Conditions
5.1.1.
AIFs may invest only in Equity instruments and Equity-linked instruments.
Such investments can be made only in offshore venture capital undertakings.
The USD 1,500 million limit is a combined limit for AIF’s.
Venture Capital Funds (VCFs) registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
So, the USD 1,500 million limit is not a separate USD 1,500 million limit for each AIF.
The limit is considered collectively across eligible AIFs and the specified erstwhile VCFs.
5.1.2.
For the purpose of offshore investments, “Offshore Venture Capital Undertaking” means a foreign company.
The shares of that foreign company must not be listed on any recognised stock exchange.
This applies to recognised stock exchanges in India and outside India.
Therefore, the foreign company must be unlisted both in India and abroad.
If the shares of the foreign company are listed on a recognised stock exchange in India or in any foreign country, it will not qualify as an Offshore Venture Capital Undertaking under this definition.
Example:
Foreign company whose shares are unlisted everywhere - Qualifies.
Foreign company whose shares are listed on a recognised stock exchange in the US -Does not qualify.
Foreign company whose shares are listed on a recognised stock exchange in India - Does not qualify.
5.1.3.
The investment by an AIF in Offshore Venture Capital Undertakings is subject to an additional limit.
Such investments must not exceed 25% of the investable funds of the scheme of the AIF.
The 25% limit is calculated with reference to the investable funds of the particular scheme, not the total funds of the AIF as a whole.
5.1.4.
AIFs can invest in an overseas investee company only if the company is incorporated in a country meeting the specified regulatory cooperation requirement.
The securities market regulator of that country must be either:
(i). An Appendix A Signatory - The regulator must be a signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU).
(ii). A Bilateral MOU Signatory with SEBI - The regulator must have entered into a bilateral Memorandum of Understanding with SEBI.
So, the country in which the overseas investee company is incorporated must have a securities market regulator with an established information-sharing and regulatory cooperation arrangement.
5.1.5.
AIFs cannot invest in an overseas investee company if the company is incorporated in a country identified by the Financial Action Task Force (FATF) in its public statement as having specified AML/CFT deficiencies.
The restriction applies to the country in which the overseas investee company is incorporated.
The restriction applies in the following cases:
(a). Jurisdiction subject to counter-measures
The country has strategic deficiencies in Anti-Money Laundering (AML) or Combating the Financing of Terrorism (CFT).
Counter-measures apply to that jurisdiction.
(b). Jurisdiction not making sufficient progress
The country has not made sufficient progress in addressing the identified AML/CFT deficiencies; or
The country has not committed to an action plan developed with FATF to address those deficiencies.
Therefore, an AIF must ensure that the overseas investee company is not incorporated in a FATF-identified restricted jurisdiction before making the investment.
5.1.6.
AIFs making overseas investments must comply with the applicable foreign exchange and overseas investment framework.
Such investments are subject to:
Foreign Exchange Management (Overseas Investment) Rules, 2022.
Foreign Exchange Management (Overseas Investment) Regulations, 2022.
Master Direction – Overseas Investment, dated July 24, 2024.
AIFs must also comply with any amendments made to the above Rules, Regulations and Master Direction from time to time.
AIFs must further comply with related directions issued by RBI regarding overseas investment.
In addition to the above, AIFs must comply with the broader Foreign Exchange Management Act, 1999 (FEMA).
This includes compliance with:
FEMA, 1999.
Rules made under FEMA.
Regulations made under FEMA.
Directions issued by the Government of India or RBI from time to time.
5.1.7.
AIFs are not permitted to invest in a Joint Venture (JV) while making overseas investments.
AIFs are also not permitted to invest in a Wholly Owned Subsidiary (WOS) while making overseas investments.
Therefore, an AIF's overseas investment cannot be structured through:
A Joint Venture.
A Wholly Owned Subsidiary.
This restriction applies specifically to overseas investments made by AIFs.
5.1.8.
If more than 50% of the funds of an AIF have been contributed by a single NBFC, additional requirements apply.
In such a case, the AIF must comply with all applicable RBI requirements governing:
Opening of branches abroad.
Setting up of subsidiaries abroad.
Setting up of Joint Ventures (JVs) abroad.
Undertaking investments abroad by NBFCs.
The relevant RBI guidelines applicable to NBFCs must be followed.
The requirement is triggered when one NBFC contributes more than 50% of the AIF's funds.
5.1.9.
AIFs must ensure that any transfer or sale of an overseas investment is made only to an eligible entity.
The transferee or purchaser must be an entity that is permitted to make overseas investments under the applicable FEMA framework.
The eligibility of the transferee must be determined based on the guidelines in force at the time of the transfer or sale.
The relevant framework includes:
Foreign Exchange Management Act, 1999 (FEMA);
Foreign Exchange Management (Overseas Investment) Rules, 2022.
Other applicable FEMA guidelines and directions.
Therefore, an AIF cannot freely sell or transfer its overseas investment to any entity. The buyer/transferee must itself be eligible to make that overseas investment under FEMA.
5.2. Allocation of overseas investment limit
5.2.1.
AIFs intending to make overseas investments must apply to SEBI for allocation of the overseas investment limit.
The application must be made in the format prescribed under Annexure 8.
Along with the application, an undertaking regarding the proposed overseas investment must be submitted to SEBI.
The undertaking must be submitted by the relevant governing body of the AIF:
Trustee, where the AIF is structured as a trust;
Board, where the AIF is structured as a company; or
Designated Partners, where the AIF is structured as an LLP.
The undertaking must be in the format specified in Annexure 8.
Therefore, before making the proposed overseas investment, the AIF must complete both:
Application to SEBI for allocation of overseas investment limit; and
Undertaking by the Trustee/Board/Designated Partners regarding the proposed investment.
It is clarified that no separate permission from RBI is necessary in this regard.
5.2.2.
The allocation of overseas investment limits to AIFs will be made on a “first come, first serve” basis.
So , applications will generally be considered in the order in which they are received.
The allocation is subject to the availability of the overall overseas investment limit.
The overall limit available for such investments is USD 1,500 million.
Once the available overall limit is exhausted, further applications cannot be allocated a limit unless additional capacity becomes available.
Example:
The overall available limit is USD 1,500 million.
AIF A applies first and receives an allocation.
AIF B applies subsequently and receives an allocation from the remaining available limit.
Later applicants can receive allocations only to the extent that the overall limit remains available.
5.2.3.
If an AIF has already been allocated a certain overseas investment limit and wants to obtain an additional investment limit, it must submit a fresh application to SEBI.
The fresh application will be considered based on the date on which the fresh application is received by SEBI.
The AIF will not receive any preference merely because it had already received an earlier allocation.
Therefore, the AIF's previous allocation does not give it any priority or preferential treatment for obtaining an additional limit.
The fresh application will be treated like other applications and considered according to the first come, first serve basis.
Example:
AIF A already has an overseas investment limit of USD 50 million.
AIF A later applies for another USD 20 million
This additional application will be considered based on the date of receipt of the new application.
AIF A will not get priority over another AIF that submitted its application earlier.
5.2.4.
An AIF that receives an overseas investment limit from SEBI must utilise the allocated limit within the prescribed time period.
The AIF has a maximum period of 4 months from the date of SEBI's approval to make the allocated investments.
The investment must be made in eligible offshore venture capital undertakings within this 4-month period.
If the AIF fails to utilise the allocated limit within 4 months, the unused portion of the allocation may be dealt with by SEBI.
SEBI may reallocate the unutilised investment limit to other applicants.
Therefore, an AIF cannot indefinitely hold an allocated overseas investment limit without using it.
Example:
SEBI approves an overseas investment limit on 1 August.
The AIF has 4 months from 1 August to utilise the allocated limit.
If the AIF does not utilise the limit within the stipulated period, SEBI may allocate the unutilised portion to another applicant.
5.2.5.
If an AIF liquidates or sells an investment made in an overseas investee company, the proceeds received from such liquidation can be used for reinvestment.
The amount available for reinvestment is limited to the amount originally invested in that overseas investee company.
Such available amount can be utilised by all AIFs, including the AIF that originally made and liquidated the investment.
Therefore, the reinvestment availability is not restricted only to the AIF that made the original investment.
Example:
AIF A invested USD 20 million in an overseas investee company.
AIF A later liquidates the investment and receives USD 25 million.
Only USD 20 million, being the amount originally invested, becomes available for reinvestment.
The additional USD 5 million is not covered by this specific reinvestment availability.
5.3. Reporting of overseas investments
5.3.1.
AIFs that utilise their allocated overseas investment limit must report such utilisation to SEBI.
The report must be submitted through the SEBI Intermediary Portal.
The reporting must be completed within 5 working days from the date of utilisation of the overseas investment limit.
5.3.2.
AIFs must also report certain matters relating to their allocated overseas investment limits through the SEBI Intermediary Portal.
(a). Entire overseas limit not utilised
If an AIF does not utilise any portion of the overseas investment limit allocated to it within the 4-month validity period, it must report the same to SEBI.
The report must be submitted within 2 working days after expiry of the validity period.
(b). Part of the overseas limit not utilised
If an AIF utilises only part of the allocated overseas investment limit within the validity period, the remaining unutilised portion must be reported.
The report must be submitted within 2 working days after expiry of the validity period.
(c). Voluntary surrender of overseas limit
If an AIF/VCF decides to surrender its allocated overseas investment limit at any time during the validity period, it must report the surrender.
The report must be submitted within 2 working days from the date of the decision to surrender the limit.
The validity period means the 4-month period from the date of SEBI's approval for the overseas investment limit.
Therefore, the reporting timelines are:
No utilisation: Within 2 working days after expiry of 4 months.
Partial utilisation: Within 2 working days after expiry of 4 months.
Voluntary surrender: Within 2 working days from the date of the surrender decision.
5.3.3.
AIFs shall report the sale/divestment of their overseas investments to SEBI.
The report must be submitted in the format prescribed in Annexure 9.
The report must be submitted within 3 working days from the date of divestment.
The details shall be sent by email to aifreporting@sebi.gov.in.
The purpose of reporting is to enable SEBI to update the overall limit available for overseas investments by AIFs.
