The Securities Exchange Board of India (SEBI) has relaxed two norms governing overseas investments of Indian private equity and venture capital funds, thereby expanding the scope of the capital that can be invested abroad.
First, it has allowed Indian private equity and venture capital funds to invest in overseas companies even if they do not have an Indian connect, according to a filing.
Till now, PE or VC funds under SEBI’s Alternative Investment Funds (AIF) regime could only invest in overseas companies which had an Indian connect by way of a subsidiary, following a circular issued on 5 October, 2015.
That requirement has been done away with through the latest circular issued on August 17.
Second, SEBI has said the principal proceeds from the sale of an overseas security held by an Indian AIF shall become available to all AIFs for re-investment.
Indian AIFs can collectively only invest $1.5 billion in overseas entities, which was also capped at 25% of the individual fund’s corpus. This cap was breached last month, causing angst within the AIF community, as VCCircle reported on 8 July. Some funds said this was making them less competitive compared to global peers. However, RBI has been reluctant to raise the cap to avoid weakening the rupee.
While the cap has not been lifted, by allowing for reinvestments, funds will get greater use from the allowed $1.5 billion limit, as mandated by the RBI.
This means, if a fund invested $10 million overseas in a startup which it has now exited, the $10 million is now available for use once again.
“The recycling of the principal invested overseas into the overall allowance will extend the longevity of said allowance. These moves by SEBI will make Indian AIFs more attractive to investors, global and Indian, and will further fuel the growth of the AIF industry,” said Siddarth Pai, co-chair - Regulatory Affairs Committee, IVCA and founding partner, 3one4 Capital.
"The recent changes by SEBI to the overseas investment framework eases the process considerably by liberalizing it as well as addressing longstanding concerns of the industry. The removal of the 'India connect' allows Indian AIFs to go global in their stock selection and bring geographical diversity to their investment thesis,” Pai added.