Alternative Investment

SEBI ISSUES GUIDELINES FOR INVESTMENT IN OVERSEAS COMPANIES BY AIF/VCF: OVERSEAS INVESTEE COMPANY NO LONGER REQUIRED TO HAVE AN INDIAN CONNECTION – Securities


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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:

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

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

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

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

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

  6. 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
).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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