Indian investment in overseas funds is governed by a combined reading of the Foreign Exchange Management (Overseas Investment) Rules, 2022 ("OI Rules") and the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("OI Directions") (jointly referred to as the "OI Framework").
Before the amendments (as elaborated below), Paragraph 1(ix)(e) of the OI Directions specified that investment in units of any investment fund abroad, regulated by the financial regulator in that host country, would be classified as Overseas Portfolio Investment ("OPI"). This allowed listed Indian companies and resident individuals to engage in OPI in overseas funds, provided two conditions were met: (i) the investment had to be in the form of 'units' of the foreign fund; and (ii) the fund had to be regulated in its home jurisdiction.
The Reserve Bank of India ("RBI"), through its Circular No. 09, RBI/2024-25/41 A.P. (DIR Series) dated June 07, 2024 ("Circular")1, issued to all Category-I Authorised Dealer Banks, amended the OI Directions – Investments in Overseas Funds.
As per the Circular, the following amendments have been carried out to the OI Directions:
(a) Paragraph 1(ix)(e) of the OI Directions has been replaced with the following paragraph (the new changes proposed are highlighted in bold lettered text):
"The investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund overseas, duly regulated by the regulator for the financial sector in the host jurisdiction, shall be treated as OPI. Accordingly, in jurisdictions other than IFSCs, listed Indian companies and resident individuals may make such investment. Whereas in IFSCs, an unlisted Indian entity also may make such OPI in units or any other instrument (by whatever name called) issued by an investment fund or vehicle, in terms of schedule V of the OI Rules subject to limits, as applicable.
The following explanation has also been added "Explanation: '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."
(b) Paragraph 24(1) of the OI Directions has been replaced with the following paragraph:
"A person resident in India, being an Indian entity or a resident individual, may make investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund or vehicle set up in an IFSC, as OPI. Accordingly, in addition to listed Indian companies and resident individuals, unlisted Indian entities also may make such investment in IFSC."
By way of this Circular, the RBI has now permitted resident individuals and listed companies to invest in offshore funds managed by regulated fund managers. Previously, the OI Rules only allowed investment in overseas funds that were regulated. This implies that Indian residents can now participate in overseas funds where the fund manager is regulated, opening up investment opportunities. For example, in jurisdictions such as Singapore and the United States, it is the fund manager who is regulated, rather than the fund. As a result, there will be wider investment options for Indian investors. Singapore based funds are known to be attractive investment options for the investors on account of Singapore's strong reputation for global fund management expertise and stability as a top-tier investment destination.
With the RBI's revised mandate, general partners now have the flexibility to set up their funds in jurisdictions offering superior commercial advantages, without concerns about the permissibility of Indian investments.
Further, the ambiguity surrounding the legal structure of the fund has been eliminated by the Circular. Now, investments are not only allowed in "units" as was previously, but also in other financial instruments, including the issuance of shares or other capital instruments. This change introduces flexibility and the potential for tax efficiency. The amendment provides flexibility not only in jurisdiction but also in the legal structure of the fund. With overseas portfolio investments no longer restricted to investments solely in offshore fund units, general partners now have the freedom to establish funds as limited partnerships, Limited Liability Company (LLCs), Variable Capital Company (VCCs), corporations, and more.
The abovementioned notification aims to better synchronize the OI Framework with various fund structures abroad, which in turn is likely to enhance overseas investments and expand opportunities for overseas investments by Indian entities.
Footnote
1. Reserve Bank of India – Notifications (rbi.org.in)
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