Latest SEBI Guidelines for Overseas Investment by AIFs and VCFs

Prabhat Nigam

10 Sep, 2022

On 17th August 2022, vide circular number SEBI/HO/AFD-1/PoD/CIR/P/2022/108, a Circular was issued by the Securities and Exchange Board of India (SEBI) wherein SEBI issued guidelines on the overseas investment by AIFs and VCFs. SEBI, through these guidelines, has allowed the Alternative Investment Funds (AIFs) to invest in securities of companies that are incorporated outside India. Additionally, the Venture Capital Funds (VCFs) have been allowed to make investments in offshore venture capital undertakings provided such AIFs and VCFs comply with the following conditions.

Entities to whom the circular on guidelines for overseas investments by AIFs and VCFs is applicable

The Circular on the “Guidelines for overseas investments by AIFs and VCFs” is applicable to the following entities:

1. All the Alternative Investment Funds (AIFs)
2. All the Venture Capital Funds [registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996]^[1]

Conditions lain in the Circular for overseas investment by AIFs and VCFs

• AIFs and VCFs have to file an application to SEBI

The Circular makes it necessary for the AIFs and VCFs to file an application with SEBI for the allocation of overseas investment limits. The format of the application has been provided in Annexure A of the Circular.

• Investee Company need not have an Indian connection

Earlier, there was a requirement that an overseas investee company need to have an Indian connection. This requirement has been done away with via this Circular.

• Investee Company must be incorporated in a country that is a signatory to IOSCO MMoU

The AIFs and VCFs have been permitted to invest only in those overseas investment companies that have been incorporated in a country whose securities market regulator is a signatory to

1. IOSCO MMoU (International Organisationof Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories)); or
2. Bilateral Memorandum of Understanding with SEBI.

• Overseas Investee Company must not be in a country that is on the FATF list

The Circular has clarified that AIFs and VCFs cannot invest in an overseas investment company that has been incorporated in a country identified in the public statements made by the Financial Action Task Force (FATF) as:

1. A jurisdiction having deficiencies in Combating with Financing of Terrorism or strategic Anti-Money Laundering to which counter measures have been put in place by the FATF; or
2. A jurisdiction that has not made sufficient efforts and enough progress in dealing with the deficiencies or has not committed itself to an action plan developed with FATFto deal with such deficiencies.

• Sale proceeds made from the liquidation of Investee Company available to all AIF and VCFs

Where an AIF or VCF had previously liquidated investment in an overseas investee company, the sale proceeds derived from such liquidation shall be available for reinvestment in the said overseas company to all the AIFs and VCFs (including the selling AIF and VCF). It must be noted that the sale proceeds shall be available to the extent of the investment made in the Overseas Investee Company.

• AIFs/VCFs shall transfer the investment to only eligible entities according to FEMA, 1999

The Circular prescribes that the AIFs and VCFs can transfer/sell the investment made in the Overseas Investee Company only to those entities that are eligible to make overseas investments as per the prevailing guidelines issued under the Foreign Exchange Management Act, 1999.

• Details of the sale shall be furnished with SEBI within 3 working days

The Circular makes it mandatory that the AIFs and VCFs furnish the details of the sale/transfers made by the AIFs and VCFs with SEBI within a period of 3 working days of such divestment. The information must be furnished in the prescribed format given in Annexure B of the Circular. The details will be shared by emailing on aifreporting@sebi.gov.inin order to update the overall limit available for overseas investment by AIF and VCF.

• Details of All the sales shall be furnished with SEBI within 30 days

The Circular has also asked the AIFs and VCFs to report all the overseas investments divested/sold by them to SEBI within a period of 30 days from the date of this circular. These details will be shared in the format prescribed under Annexure B by emailing to aifreporting@sebi.gov.in.

Who will submit the undertaking to SEBI about the overseas investment?

The Circular states that the Board/Trustee/Designated Partners of the VCFs and AIFs will be required to submit the undertaking to SEBI about the proposed overseas investment. Such undertaking will be submitted in the prescribed format prescribed in Annexure A.

Date of coming into effect

The directions in this Circular shall come into effect immediately, i.e. from 17th August 2022 only, and all the AIFs and VCFs need to comply with the above-mentioned conditions with immediate effect.

Conclusion

This Circular on the conditions on overseas investment by AIFs and VCFs has been issued with the approval of the competent authority and has been brought after exercising the powers conferred on the SEBI under sub-section 1 of section 11 of the SEBI Act, 1992 with an intent to promote the development and regulate the securities market and also to protect the interests of the investors in the securities market. 

Read our Article: Asset Management: Alternative Investment Funds