The Securities and Exchange Board of India (SEBI) has relaxed norms for venture capital and private equity firms to invest in overseas companies with back-end operations in India, a move aimed at boosting entrepreneurship and preventing such businesses from shifting outside the country.
In a circular on Tuesday, the capital markets regulator allowed PE and VC firms to invest up to $750 million, albeit with greater disclosure requirements, in overseas companies.
That’s up from the $500 million limit it had set in October 2015. At the time, SEBI had allowed VC and PE firms to invest 25% of their funds in foreign companies having an Indian connection subject to the overall limit.
The regulator’s 2015 decision had come in the wake of several Indian entrepreneurs incorporating their tech ventures overseas while keeping their engineering and operation teams in India, due partly to taxation and regulatory regimes at home. Flipkart, Freshdesk and Quikr were among such top new-age tech firms.
Prior to October 2015, VC and PE firms could invest only 10% of their funds in offshore businesses with an India link. The changes were made after industry representations highlighting the potential of Indian entrepreneurship.
On Tuesday, SEBI also said that in exchange for higher limits, PE and VC funds will be required to mandatorily disclose the overseas investment within five working days.
PE and VC funds that do not use their limits for six months from the approved date will be required to report the status within two working days after the approval expires. The funds can also surrender their overseas limits but will have to report the decision to SEBI within two days.
As many as 402 alternative investment funds are registered with SEBI as on June 2018. The number has risen nearly three times in as many years owing to interest from institutional investors and high net-worth individuals, who look to diversify their investment bets with diverse strategies. As for fund managers, it is easier to manage pooled capital compared to individual portfolios under the wealth management format.
SEBI has three categories for alternative investment funds. The first category comprises social venture funds, small and medium-sized enterprise (SME) funds, infrastructure funds, VC funds and angel funds. The second category comprises PE and debt funds. The third category includes long-only equity and hedge funds that use diverse or complex trading strategies.
The total fundraise by PE and VC firms in India may rise to Rs 3 trillion by the end of 2019-20 from Rs 1.16 trillion at the end of September 2017, according to industry body Indian Private Equity and Venture Capital Association.