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SEBI issues guidelines for investment in overseas companies by AIF/VCF: Overseas investee company no longer required to have an Indian connection

Aug 19, 2022
  • Author(s) : Manendra Singh , Tanvi Goyal, Aditi Ladha.

    • In an important development, SEBI has issued guidelines for investment in overseas companies by alternative investment funds (AIF) / venture capital funds (VCF).

    Pursuant to the erstwhile SEBI (Venture Capital Funds) Regulations 1996 and the present SEBI (Alternative Investment Funds) Regulations, 2012, AIF/ VCF are permitted to invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the RBI and SEBI from time to time. In this regard, SEBI has issued guidelines laying down the following key aspects:

    A. Application format prescribed for applying to SEBI for allocation of overseas investment limit

    B. No requirement for overseas investee company to have an Indian connection

    C. Restriction imposed on investment in overseas investee company incorporated in certain countries

    D. Investment liquidated by AIF/ VCF will be available for reinvestment

    E. Sale/transfer of investment in overseas investee company permitted subject to guidelines issued under FEMA

    F.Details of sale/ disinvestment are required to be submitted to SEBI within prescribed timelines

    Summary of key requirements:

    Application for allocation of overseas investment limit AIFs/VCFs shall file an application to SEBI for allocation of overseas investment limit inter alia containing the following details:

    • Applicant and its scheme: Name of the AIF/VCF, category of AIF, registration number, name of scheme, name and address of branch of the bank through which the foreign currency transaction is proposed to be made
    • Details of overseas investee company: Name, country, date of incorporation of the overseas investee company, whether any investor of the AIF is a connected person of the overseas investee company
    • Details of investment: Type of instrument in which investment is proposed, nature of investment, amount proposed to be invested, amount invested in previous overseas investment, investible corpus of the scheme of the AIF/VCF
    • Details of overseas investments made by the scheme in the past if any.
    • Undertaking by Trustee/Board/Designated Partners of the AIFs/VCFs: Undertaking in respect of independent due diligence being carried out for the proposed investment, and satisfaction of (i) the bona fide nature of the proposed investment, (ii) its alignment with the investment objective of the scheme, and (iii) compliance with the regulatory framework.
    • Undertaking by Manager of the AIF/VCF: Undertaking in respect of inter alia the following:

    –  Manager has exercised due diligence with respect to the investment decision

    –  Proposed investment is an equity/equity linked investment

    –  Overseas investee company is a foreign company whose shares are not listed on any recognized stock exchange in India or abroad.

    – AIF/VCF will not invest in a joint venture/ wholly owned subsidiary while making overseas investments.

    –  Adherence with Foreign Exchange Management Act, 1999 (FEMA) and regulations issued thereunder, and other guidelines specified by RBI in respect of overseas direct investment.
    No requirement for overseas investee company to have an Indian Connection The requirement of the overseas investee company to have an Indian Connection, as specified in previous SEBI circulars dated August 9, 2007 (available here) and circular dated October 1, 2015 (available here), has been done away with.
    Restriction on investment in overseas investee company incorporated in certain countries
    • AIFs/VCFs to invest in an overseas investee company, which is incorporated in a country whose securities market regulator is:

    – a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or

    –  a signatory to the bilateral Memorandum of Understanding with SEBI.

    • AIFs/VCFs shall not invest in an overseas investee company, which is incorporated in a country identified in the public statement of Financial Action Task Force (FATF) as:

    –  a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

    –  a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with FATF to address the deficiencies.
    Liquidation of investments made in overseas investee company 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.
    Sale/transfer of investment in overseas investee company AIFs/VCFs to transfer/sell the investment in overseas investee company only to the entities eligible to make overseas investments, as per the extant guidelines issued under FEMA.
    Furnishing of details of sale/ disinvestment AIFs/VCFs to furnish the sale/divestment details of the overseas investments to SEBI in the prescribed format within 3 working days of the divestment for updating the overall limit available for overseas investment by AIFs/VCFs.

    All the overseas investments sold/divested by AIFs/VCFs till date, shall also be reported to SEBI in the prescribed format within 30 days from the date of the circular.

    The above guidelines have been issued vide SEBI circular date August 17, 2022 (available here).

     We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Associate Partner –ManendraSingh@elp-in.com ;
    Tanvi Goyal, Principal Associate –TanviGoyal@elp-in.com;
    Aditi Ladha, Associate- AditiLadhai@elp-in.com

    Disclaimer:
    The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.