The Securities Exchange Board of India (SEBI) has done away with the need for locally registered private equity and venture capital funds to show an India connection to invest in a company incorporated overseas, while also opening up the window for more such transactions.
Existing norms for investment vehicles registered under SEBI’s Alternative Investment Fund (AIF) regime allow such funds to invest as much as 25% of their own corpus in one or more overseas companies.
However, the aggregate value of such overseas investments by local AIFs is restricted to $1.5 billion, due to concerns related to the currency by the central bank.
The existing norms required such AIFs to invest only in such companies that have an India connection. This was with respect to cases where the front office of the target is incorporated overseas and the back-end operations are located in India.
Many technology ventures, especially startups, operate with such corporate structures.
Last year, the AIF Policy Advisory Committee (AIFPAC) had recommended elaborating the term ‘Indian connection’ to specify that the Indian entity should be a direct subsidiary of the overseas investee company and there is a minimum tenure of the service agreement for the backend entity so that the intended benefits to the Indian connection are accrued for considerable time post investment.
After this, a working group constituted by SEBI suggested removing the need for the ‘connection’ altogether. The AIFPAC, which met recently, too, recommended doing away with the need to show an India connection.
SEBI has accepted the suggestion and scrapped the need for a local connection.
This means that now Indian PE-VC funds can invest in overseas entities even if such businesses do not have a local subsidiary or a back office. This would allow, for instance, Indian AIFs to invest in US-based tech startups founded by Indian-origin executives even if they do not have their engineering teams sitting in India.
In another significant move, SEBI has also provided flexibility to local AIFs to reinvest the sale proceeds from an existing overseas investment to the extent of the principal without counting it as part of the overall industry ceiling of $1.5 billion.
While there have been separate calls to push up this ceiling, which is dependent on approval from the Reserve Bank of India, SEBI has provided some legroom for additional overseas investment till the time the upper limit is raised.
This means that if a VC fund had invested $20 million in an international tech venture and exited the investment, the $20 million will be released and deducted from the overall $1.5 billion overseas investment limit.
SEBI is in discussions with the RBI to separately push up the $1.5 billion ceiling to $3 billion.