Recent RBI Circular amending Overseas Investment Framework for Investment fund (AIF) overseas

In August 2022 , Reserve Bank of India issued Overseas Investment Framework(OI), which imposed two major limitations imposed on the Indian investors investing in Overseas investment funds and AIFs in IFSC:

First Limitation : The OI framework stated that investment fund or vehicle must be directly regulated by the financial sector in the host jurisdiction” effectively taking funds/investment vehicles operating in jurisdictions like Singapore out of purview of investments ?as these funds are regulated through the fund manager.

This created a situation where overseas investment fund being not covered under the ambit of? foreign entity restricted , Persons Resident In India,(PRI) ?to invest in such funds under the new OI Framework.

Second Limitation : The OI framework restricted vide Para 1(x)( e) of and para 24(1) of the Foreign Exchange Management (Overseas Investment) Directions 2022, limited the scope of permissible investments to only “units” of overseas funds . This resulted in listed Indian entities and Resident Individuals unable to invest in overseas funds structured in forms other than trusts such as VCC (Variable capital companies) and other corporate structure in jurisdictions like Singapore.

To remove these limitations, RBI vide its Circular dated June 07, 2024 provided 2 important clarifications that stated

1. “investment fund overseas, duly regulated’ for the purpose of this para shall also include funds whose activities are regulated by financial sector regulator of host country or jurisdiction through a fund manager.”

2. Amending Paragraph 1(ix)(e) of FEM (OI) Directions, 2022 and Paragraph 24(1) of FEM (OI) Directions, 2022 and stating that investments can be “made in units or any other instrument (by whatever name called)” issued by the overseas funds

Thus, RBI vide this circular streamlined the limitations imposed by the Overseas Investment framework thereby allowing Indian investors to invest in overseas funds regulated through the fund managers and now permitting investment in any instruments and not only units of trust.

With these clarifications and amendments, the Reserve Bank of India has effectively removed significant barriers that previously hindered investment in overseas funds outside India as well as in IFSC. It is a welcome move as it aligns India's investment framework more closely with global investment practices.

Author: Mohit Mittal, is the managing partner of One Stop Consultants & Services LLP engaged in structuring , drafting of fund documents and setting up the AIF in domestic and GIFT city.

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