SEBI Drops Indian Connection Clause For AIFs, VCs

SEBI Drops Indian Connection Clause; Allows AIFs, VCs To Go ‘Truly’ Global

SUMMARY

AIFs and VCs can now invest in countries that have signed the IOSCO memorandum and stay away from AML laws deficit countries

SEBI has also allowed investors to reinvest their sales proceeds in foreign companies with a ceiling of $1.5 Bn

The guidelines have come into effect immediately, SEBI has stated

The Securities Exchange Board of India (SEBI) has come out with new guidelines for Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs) that invest abroad.

In the latest guidelines, SEBI has done away with the clause of the investee company having an Indian connection. AIFs can invest in securities of companies incorporated outside India. Further, according to certain conditions, VCs can invest in off-shore venture capital companies.

Previously, Indian funds could only invest 25% of their funds in foreign companies having an Indian connection – an office in India. But only last year, SEBI had been mulling the definition of ‘India connection’, while the ceiling of 25% remains.

According to the circular published by SEBI on August 17, 2022, AIFs or VCFs can invest in a foreign company from a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding or a signatory to the bilateral Memorandum of Understanding with SEBI.

Further, the circular states that AIFs and VCFs will not invest in a company from a country identified in the public statement of the Financial Action Task Force (FATF). According to SEBI, some of these countries have no strategic anti-money laundering (AML) measures or are deficient in countering the financing of terrorism.

The circular has also explicitly disallowed AIFs and VCFs from investing in a country that has not made sufficient progress in addressing the AML deficiencies or has not committed to an action plan developed with FATF to address such deficiencies.

SEBI has also allowed investors to reinvest their sales proceeds in foreign companies with a ceiling of $1.5 Bn, up from $750 Mn until 2021. It is also reportedly discussing with the RBI to double the limit to $3 Bn.

“If an AIF/VCF liquidates investment made in an overseas investee company previously, the sale proceeds received from such liquidation to the extent of investment made in the said overseas investee company shall be available to all AIFs/VCFs (including the selling AIF/VCF) for reinvestment,” the regulator stated.

The guidelines have come into effect immediately, SEBI has stated.