SEBI’S NEW GUIDELINES FOR OVERSEAS INVESTMENT BY ALTERNATIVE INVESTMENT FUNDS
INTRODUCTION
Pursuant to Circular No. SEBI/HO/AFD-1/PoD/CIR/P/2022/108 (“SEBI Circular”) dated 17th August, 2022, the Securities and Exchange Board of India (“SEBI”) has issued new guidelines for overseas investment, i.e. (investment in securities of companies incorporated outside India) by Alternative Investment Funds (“AIFs”). This Update discusses the key changes introduced by SEBI Circular in this regard.
KEY CHANGES INTRODUCED BY THE NEW GUIDELINES
AIFs can make investments even in those foreign entities which do not have any Indian Connection
Earlier, AIFs could invest only in those companies incorporated outside India which had an ‘Indian Connection’. This requirement has now been done away with.
Permitting reinvestment of proceeds generated from liquidation of overseas investments to the extent of the principal amount invested
SEBI Circular now allows AIFs to reinvest sale proceeds generated out of liquidation of their overseas investments to the extent of the principal amount invested in the overseas investee company without having to make a fresh application to SEBI for allocation of funds.
For example – if an AIF has invested USD 100,000 (US Dollars One Hundred Thousand) in an overseas investee company and this investment has been liquidated for USD 200,000 (US Dollars Two Hundred Thousand), then the AIF can use the sale proceeds from such disinvestment and reinvest the principal amount (i.e. up to USD 100,000) in any other overseas company without taking a separate approval of SEBI.
Jurisdiction guidelines
AIFs are permitted to invest in only those overseas investee companies which are incorporated in countries where the securities market regulator is either:
- a signatory under Appendix A of the International Organization of Securities Commission’s (“IOSCO”) Multilateral Memorandum of Understanding[1]; or
- a signatory to the bilateral Memorandum of Understanding (“MOU”) with SEBI [2]
AIFs cannot invest in overseas investee companies which are 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;[3] 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.
There are a few countries[4] which are a signatory under IOSCO or have a bilateral MOU with SEBI and at the same time they are also on the list of countries identified in the public statement of FATF. In this regard, there is no clarification as to whether such AIFs shall be allowed to make overseas investments.
Sale/Transfer of overseas investment
AIFs can sell or transfer the investment in the overseas investee company only to those entities which are eligible to make such overseas investments as per the guidelines issued under the Foreign Exchange Management Act, 1999 (FEMA).
Compliances and Regulatory Reportings
The AIFs have to file an application with SEBI for allocation of overseas investment limit as per the prescribed format mentioned in the SEBI 2022 Circular. This application is to be filed along with an independent due diligence undertaking the manager of AIFs and the trustee/board/designated partners. In so far as the undertaking from trustee/board/designated partners is concerned, the undertaking is to the effect that are (i) the proposed overseas investment transaction is bonafide in nature, (ii) the proposed overseas investment is consistent with the investment objective of the scheme and (iii) the proposed overseas investment is in compliance with the regulatory frameworks for overseas investment by AIFs. Hence, along with the Managers, now even the trustee/board/designated hold responsibility for any non-compliance with overseas investments guidelines.
If the AIFs divest/sell its overseas investment, then the details of such sale/divestment is to be submitted to SEBI in the prescribed format within 3 (three) working days of the divestment.
All the overseas investments sold/divested by AIFs/ till date are also required to be reported to SEBI in the prescribed format within 30 (thirty) days from the date of the SEBI 2022 Circular i.e. by 16th September, 2022.
1 International Organization of Securities Commission, IOSCO MoU: Appendix A (current signatories) – 127
2 Securities and Exchange Board of India- Bilateral MOUs
3 FATF, Jurisdictions under Increased Monitoring – June 2022
4 Albania, Cayman Islands, Gibraltar, Jamaica, Jordan, Morocco, Pakistan, Panama, Syria, Turkey, Uganda, UAE etc