On 1 October, the Securities and Exchange Board of India (SEBI) issued a circular dealing with regulatory restrictions concerning overseas investments by alternative investment funds (AIFs) and venture capital funds (VCFs) which are registered under the Venture Capital Fund Regulations, 1996. SEBI has also provided clarifications with respect to issues concerning the term of a fund and certain other requirements for the investment managers to AIFs.
The key aspects of the circular are highlighted below:
Overseas investments by VCFs and AIFs
Both VCFs and AIFs can invest 25% of their investable funds in offshore venture capital undertakings. Formerly, such investments by VCFs were limited to 10% (all having Indian connections).
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The circular reiterates that AIFs and VCFs are only allowed to invest in equity and equity-linked instruments of offshore venture capital undertakings subject to a cap of US$500 million for VCFs and AIFs combined. Funds that wish to invest in overseas entities must apply to SEBI for the allocation of an investment limit. SEBI will allocate these limits on a “first come-first serve basis”.
Further, as per the circular, VCFs and AIFs must submit the following declarations under the “proposal for overseas investment” which is to be submitted to SEBI in order to obtain approval for the investment:
Declaration by the manager that due diligence has been exercised with respect to the investment decision.
Declaration by the trustee that the proposed offshore venture capital undertaking is consistent with the investment objective of the scheme/fund.
Declaration by the manager that the AIF/VCF will not invest in a joint venture or wholly owned subsidiary while making the overseas investment.
Declaration by the manager that the AIF/VCF will adhere to Foreign Exchange Management Act regulations and other guidelines specified by the Reserve Bank of India (RBI) with respect to any structure which involves foreign direct investment under the overseas direct investment route.
Declaration by the manager that the AIF/VCF will comply with all the requirements under the RBI guidelines on opening of branches/subsidiaries/joint ventures/undertaking investment abroad by non-banking financial companies (NBFCs), where more than 50% of the funds of the AIF/VCF has been contributed by a single NBFC.
Additional compliance for fund managers
Going forward, the tenure of any scheme of the AIF must be calculated from the date of final closing. At present, managers are free to peg the tenure at either the date of first closing or the date of final closing.
Managers are required to ensure that the placement memorandum is provided to investors before they make a commitment or an investment in the AIF. Managers must also ensure that an acknowledgement is received from the investor for the receipt of the placement memorandum.
Managers must organize and manage the AIFs and their schemes in the interest of unit holders of the AIF/scheme.
Managers must carry out the activities of the AIF in accordance with the placement memorandum circulated to all unit holders and as amended from time to time in accordance with AIF regulations and circulars issued by SEBI.
Managers must ensure scheme-wise segregation of bank accounts and securities accounts.
Managers must not make any exaggerated statements, whether oral or written, either about their qualifications, achievements or capability to render investment management services.
AIF, manager, trustee and sponsor must act in the interest of the AIF/scheme and not take action which is prejudicial to the interest of the unit holders. In addition, they must not place the interest of the sponsor/manager/trustee of the AIF or any of their associates above the interest of the unit holders of the AIF/scheme.
AIF, manager, trustee and sponsor must maintain high standards of integrity and fairness in all their business dealings and render at all times high standards of service, exercise due diligence and exercise independent professional judgment.
AIF, manager, trustee and sponsor must not offer any assured returns to any prospective investors/unit holders.
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