The Reserve Bank of India (RBI) on 7 June 2024 released the much-awaited circular liberalising the rules governing investments in overseas funds. What does it say?
- The circular permits Indian Limited Partners (LPs) to invest in overseas funds regulated via their regulated investment manager thereby doing away with the erstwhile prerequisite that the investment could only be made in funds that were directly regulated by the financial regulator of the host country.
- Secondly, it lifts the restrictions limiting Indian LP investment solely in units issued by overseas funds thus expanding the scope of investment instruments in fund vehicles.
- The circular facilitates and simplifies the extant norms, thereby enabling Indian resident investors and companies to make overseas investments, especially carry and co-investment contributions, in offshore/overseas fund vehicles, such as Overseas Portfolio Investment (OPI).
Pre-liberalisation framework
- Earlier, OPI was permitted only if the funds were regulated in their home jurisdiction and the investments were in units of the funds, according to the overseas investment framework, 2022.
- The framework is a combined reading of the Foreign Management (Overseas Investment) Rules, 2022 (OI Rules), and the Foreign Exchange Management (Overseas Investment) Directions, 2022.
- The OI Directions had carved out a route for unlisted Indian entities, listed Indian companies, and resident individuals to make OPI into overseas funds.
- However, the permission was subject to the conditions that the investment had to be made in units of the overseas funds and the fund had to be regulated in its host jurisdiction.
- The restrictive language of the framework caused interpretational ambiguity on the permissibility of an investment in any other form of instrument of such overseas funds among the authorised dealer banks.
- This prevented several offshore fund vehicles set up as corporate bodies issuing shares, stocks, partnerships, or membership interests rather than as trust-issuing units, from receiving OPI.
- Hence, the usual approach taken by the authorised dealer banks in regard to due regulation of the funds was that remittance would be permitted where the fund was directly regulated and not via their manager.
- Consequently, the Indian LPs encountered hardships in meeting their pre-framework capital commitments where the fund was located in a jurisdiction whose financial sector regulator did not substantially regulate the fund and was regulated through its manager.
Amendments: Nature of instrument and Regulation of fund
- In view of the above, several representations seeking clarity as to the framework and ease of business were tendered to the Ministry of Finance and the RBI.
- The RBI amended Paragraph 1 (ix) (e) and Paragraph 24 (1) of the OI Directions to do away with the caveats, thereby taking into account the diverse legal and regulatory framework governing investment funds from across various jurisdictions.
- The amended paragraph provides that the investment including sponsor contribution in units or any other nature of the instrument (by whatever name called) issued by an investment fund overseas, duly regulated by the regulator for the financial sector in the host jurisdiction shall be treated as OPI.
- Therefore, in addition to investment in units of offshore investment funds in IFSC, investment shall now be permitted in any other instruments issued by such offshore funds in IFSC.
- This will expand the scope in legal form of the fund from trusts issuing units to funds set up as LPs, General Partners (GPs) of PE/VC funds, LLCs, VCCs, and other corporate entities. This enables OPI from those barred by authorised dealer banks under the previous regime owing to the restrictions placed earlier.
- Further, it explains what may be construed as a duly regulated investment fund overseas, for the purpose of the said para. It shall also include funds whose activities are regulated by the financial sector regulator of the host country or jurisdiction through a fund manager.
- Thus, the RBI has granted flexibility to GPs for the establishment of funds in commercially favorable jurisdictions by permitting OPI investments in overseas funds regulated through their managers.
- This will also enable Indian resident individuals and Indian listed companies to be able to make OPI without ambiguity in regard to both the regulation of the fund and the nature of the instrument being issued.
- This is in line with the treatment of LP investments into funds in IFSC GIFT City where OPI is permitted despite the funds not being directly regulated.
- The relaxations will facilitate the creation of efficient structures for carry/co-investment vehicles and re-open the doors for investments in funds jurisdictions like Singapore and the US, allowing Indian stakeholders to tap into global investment opportunities directly.
(The author is a lawyer and columnist. Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com.)
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Courtesy : Financial Express. Dt.: 16th June 2024.
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