RBI Relaxes Norms for Overseas Investment in Offshore Funds

The Reserve Bank of India (RBI) has introduced new regulations allowing listed Indian companies and resident individuals to invest in offshore funds regulated through their fund managers. These directions were issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (FEMA Act).

Key Highlights:

Regulatory Amendments:

• Foreign Exchange Management Directions: The RBI has amended the Foreign Exchange Management (Overseas Investment) Directions, 2022, to facilitate these changes.
• Overseas Portfolio Investments (OPIs): The amendments specifically address the norms for OPIs, expanding the scope and flexibility for Indian investors.

Previous Norms vs. New Regulations:

• Earlier Restrictions: Previously, OPIs were allowed only if the funds were directly regulated in their home jurisdiction, and investments had to be in units of the funds. Banks permitted remittances only to directly regulated funds, often requiring new funds to be established in jurisdictions like the Cayman Islands or Mauritius to facilitate investments from Indian LPs.
• New Permissions: The new regulations now allow Limited Partnerships (LPs), Limited Liability Companies (LLCs), Variable Capital Companies (VCCs), companies, or trusts to invest not only in units issued by overseas funds but also in any investment instrument, regardless of its form.

Key Changes:

1. Investment Flexibility:
   1. Investments can now be made in any instrument, whether in units or not.
   1. The condition that investments must be made only in funds directly regulated by the host country’s financial regulator has been removed. Investments can now be made through Investment Managers (IMs) as well.
2. Unlisted Companies:
   1. Unlisted Indian companies, including Limited Liability Partnerships (LLPs) and registered partnerships, are now permitted to invest in International Financial Services Centre (IFSC) funds under the OPI route.
   1. These companies can invest up to 50% of their last audited net worth into funds registered in the IFSC.
3. General Partners:
   1. General partners now have the flexibility to establish their funds in commercially favorable jurisdictions. Financial services regulators in jurisdictions like Singapore and the United States of America (USA) regulate the fund manager rather than the fund itself, providing more flexibility and opportunities for investment.

Significance:

The relaxation of norms by the RBI is a significant step towards facilitating greater overseas investment by Indian entities. By allowing investments through fund managers and providing more flexibility in investment instruments, the RBI aims to enhance the global investment opportunities for Indian investors. This move is expected to promote diversification of investment portfolios and enhance returns for Indian investors.

Conclusion:

The RBI’s new regulations mark a progressive shift in India’s overseas investment framework, offering increased flexibility and broader opportunities for Indian investors. These changes are poised to boost the global competitiveness of Indian companies and individuals, fostering a more robust and dynamic investment environment.