AIF investments in Mauritius, Singapore and Honk Kong under Sebi lens

Financial services players such as asset managers and wealth managers must fulfil conditions under FEMA
The Securities and Exchange Board of India (Sebi) is scrutinising overseas investments made by alternative investment funds (AIFs), especially in regions such as Mauritius, Singapore, and Hong Kong. The capital market regulator has even turned down applications proposing to make substantial investments outside of India, said two persons in the know.

Sources said besides AIFs, overseas investment proposals of some wealth managers, banks, and non-banking financial companies (NBFCs), too, have got rejected and are facing greater scrutiny. 

This follows inputs from the government and other central agencies on the possible misuse of the conditions guiding such investments as laid out under the securities laws and also the Foreign Exchange Management Act (FEMA).

“The regulator is exercising caution over new investment applications and also undertaking extensive background checks of sponsors and fund managers,” said one of the persons cited above.
According to him, the regulator wants to ensure that overseas investments made by AIFs, which includes hedge funds and venture capital funds (VCs), are not indulging in round-tripping or other prohibited activities.

 
Sebi has put a cap of $750 million on overseas investments by hedge funds and VCs. Entities are also required to submit each proposal for approval. The limit allocated must be utilised within six months from the date of the approval.

Financial services players, such as asset managers and wealth managers, need to fulfil conditions under the FEMA, which says the entity should be profitable for three years and invest in the form of joint venture (JV) or wholly-owned subsidiary (WOS) set up outside India with prior approval from the concerned regulator.

 

 
“As far as outbound investments by AIFs are concerned, there are specific parameters for the investee company that are outlined by the market regulator. An AIF interested in such an investment is required to satisfy Sebi that the offshore entity has a meaningful connection with India to result in indirect benefits to the country. There are also other requirements. Also, there is a cap (of $750 million) for all such overseas investments by AIFs under the automatic route. There should be no jurisdictional bias for approving or rejecting the proposal in our view,” said Siddharth Shah, partner, Khaitan & Co, a law firm that services foreign investors.

These jurisdictions, including Mauritius, remains a preferred destination for Asian investors, especially those wanting to invest in debt and derivatives instruments, as there is no tax to be paid on investments in these asset classes, except for the interest part in the debt instrument.
Mauritius specifically provides for two types of investments vehicles for offshore funds: Collective investment schemes, which can invest across asset classes, and closed-ended or private equity funds via an investment holding company.

In 2015, Sebi had allowed AIFs to invest up to 25 per cent of the investible funds in equity and equity-linked instruments, only of offshore venture capital undertaking with an Indian connection, subject to an overall limit of $500 million. Later, in 2018, the regulator enhanced the limit to $750 million and asked AIFs and venture funds to mandatorily disclose the utilisation of such limits within five working days of the usage on the regulator’s intermediary portal.

Further, if an AIF or VCF wished to surrender the overseas limit within the validity period, the same would have to be reported within two working days from the date of decision to surrender the limit.

AIFs are the funds established or incorporated in India for the purpose of pooling in capital from Indian and foreign investors for investing as per a pre-decided policy.  VCFs are the investment funds that manage the money of investors who seek private equity stakes in start-ups.


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