According to a circular issued by the central bank in late August regarding overseas direct investments (ODI), Indian residents are allowed to invest only in those foreign alternative investment funds (AIFs) which are regulated in the jurisdiction where the fund is located. However, in fund destinations such as Singapore and Luxembourg, the fund managers of these AIFs – not the fund per se – are regulated.
This has resulted in authorised dealer banks, which process these outward remittances, refraining from executing these transactions, said lawyers and consultants handling the matter.
“The condition that overseas funds (other than funds in IFSC-GIFT City) must be regulated by the financial services regulator of the host country for Indian resident individuals to invest into such funds under the overseas portfolio investment (OPI) route is becoming a practical issue,” said Nandini Pathak, leader-investment funds at Nishith Desai Associates. “Most jurisdictions register and regulate the fund manager, rather than the fund entity itself.”
AIFs are specialised investment products that are tailor-made for ultra-high-net-worth individuals and they invest predominantly in unlisted securities. Venture capital funds and private equity funds are sub-types of AIFs.
In some of the cases, the authorised dealer banks are asking the investors to obtain a legal opinion from the lawyers based in the jurisdiction of the investment fund. These lawyers are required to give an undertaking that the fund is regulated. They, however, have been reluctant to take up this responsibility due to the wording of Indian laws.
“The combined reading of new overseas investment rules and RBI’s master directions indicate that Indian resident individuals can invest in only those offshore funds which are regulated by their financial sector home regulator. This potentially gives rise to ambiguity vis-a-vis investment in some of the prominent offshore jurisdictions where the fund manager is issued the regulatory licence but the fund does not necessarily hold it,” said Tejesh Chitlangi, senior partner at IC Universal Legal. “However, subject to clearance from the local legal counsel, a view may have to be taken that such offshore funds, even sans a separate licence, are effectively regulated via their licensed fund manager and hence should be eligible to receive overseas portfolio investments … under LRS.”
The central government issued new ODI norms in August and the RBI’s circular is based on these rules. Before this circular, residents could invest up to $250,000 in a foreign AIF every year even if the fund was not regulated overseas, said experts. In the old regime, such an investment was considered a direct investment and subject to various compliance conditions of outward ODI.
