The Securities and Exchange Board of India (SEBI) oversees AIFs in India under the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs are excited about expanding their investment portfolios by investing in a variety of asset classes besides real estate, private equity, venture capital, hedge funds, etc. AIFs are further divided into different sub-categories depending on the fund’s unique investments, risk levels, and benefits received from regulations.
Overseas Investment by AIFs
To assist domestic investors in portfolio diversification, alternative investment funds can invest in assets overseas. The scope is large; however, there are some limitations to managing the overall risk.
- Only foreign enterprises with an Indian connection, such as a business presence in India, are eligible for investment by AIFs.
- To avoid the concentration of risk from foreign investment, SEBI has also added limits on foreign investments. The aim is to enable worldwide investment moderation while building domestic economic strength.
- To ensure transparency, AIFs are required to adhere to strict reporting and compliance guidelines. This framework manages risks while assisting Indian investors in taking advantage of international markets.
Investment Limits for Overseas Investments by AIFs
- Overall Limit
SEBI has placed an industry-wide limit on foreign direct investments by AIFs and VCFs at $1,500 million. Therefore, in the case of combined investments, AIFs cannot exceed this limit. Furthermore, the restrictions on cash flows ensure limited exposure to international markets, while at the same time addressing the foreign exchange risk of India.
- Limit Per AIF
AIFs are allowed to invest up to 25% of their investable capital in foreign markets. The investable corpus is referred to as the overall fund size minus expenditures and other liabilities. This cap allows exposure to international opportunities while ensuring that a significant portion of the money stays invested domestically.
- Approval Requirement
AIFs are required to receive approval from SEBI before making any foreign investments. This limits the issue of AIFs sidestepping the prerequisite requirement, as permits are granted on a first-come, first-served basis within the total industry limit of $1,500 million.
- Investment Eligibility:
Strict qualifying requirements have been established by SEBI for foreign investments. Only international businesses with a fundamental business relationship to the Indian economy are eligible for investment by AIFs.
To ensure that Indian industries are not negatively impacted by these investments, the investee company must not be a direct rival of any Indian enterprise.
Investments in businesses based in tax havens or in countries that the Financial Action Task Force (FATF) has blacklisted are also prohibited. This restriction keeps investments out of high-risk financial locations and guarantees adherence to global financial regulations.
- Mode of Investment
AIFs are permitted to make investments in foreign companies only in the form of stocks or other securities linked to equity. Furthermore, debt financing and other forms of direct lending are also banned. This restriction is in furtherance of SEBI’s aim to foster an investment-friendly atmosphere while helping the economy from going into foreign debt.
- Reporting and Compliance
Reports on international investments by AIFs are regularly monitored by RBI and SEBI. They have certain compliance norms to follow, such as KYC and AML regulations which are restrictive in nature. These measures work in the enforcement of order as well as the prevention of illicit financial theft.
- Withdrawal of Funds
An AIF has to return the money it makes from an overseas investment to India within a certain amount of time. According to Indian regulations, the money must either be given to investors or reinvested. This guarantees appropriate money management and adherence to Indian financial regulations.
