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Alternative Investment

SEBI Modifies Guidelines For Overseas Investments By Alternative Investment Funds And Venture Capital Funds – Securities


In a significant step forward, which offers flexibility as well
as additional compliance requirements to the Alternative Investment
Funds (AIFs) and Venture Capital Funds (VCFs), the Securities and
Exchange Board of India (SEBI) vide its Circular No.
SEBI/HO/AFD-1/PoD/CIR/P/2022/108 dated 17 August 2022 (SEBI 2022
Circular) has relaxed the guidelines for overseas investments by
AIFs and VCFs. The guidelines issued under the SEBI 2022 Circular
must be complied with in addition to such conditions or guidelines
that may be stipulated by the Reserve Bank of India (RBI) and SEBI
from time to time.

Under the guidelines for overseas investment1, an AIF
or VCF desirous of making an overseas investment is required to
obtain an allocation for the proposed amount of investment from the
overall limit of USD 1,500,000,000 (US Dollars One and Half
Billion)2 for all AIFs and VCFs as well as obtain a No
Objection Certification from SEBI in the prescribed format under
the SEBI 2022 Circular.

Part A – Relaxations introduced on Overseas

Removal of Indian Connection

Within the ambit of paragraph 3(ii) of the SEBI 2007 Circular,
read with paragraph 2(A)(e)(i) and paragraph 2(B)(c)(iv) of the
SEBI 2015 Circular, there is a requirement to only make investments
in such companies which have an ‘Indian
‘, which is interpreted as overseas companies
which have front office overseas while back office operations are
in India. Under the SEBI 2022 Circular, the requirement to have an
Indian Connection has been removed for AIFs and VCFs making
overseas investments.

Jurisdiction specific guidelines

While the requirement to have an Indian Connection has been
removed, AIFs and VCFs are only permitted to invest in investee
companies overseas which are incorporated in countries where the
securities market regulator is either:

  1. a signatory under Appendix A of the International Organization
    of Securities Commission’s (IOSCO) Multilateral Memorandum of
    Understanding (such as Luxembourg, Malaysia, and
    Netherlands)3; or

  2. a signatory to the bilateral Memorandum of Understanding (MOU)
    with SEBI (such as USA, Mauritius, Singapore, and

Further, the SEBI 2022 Circular has also introduced a negative
list of countries where the AIFs and VCFs are not permitted to
invest in investee companies overseas of such countries, which have
been identified in the public statement of Financial Action Task
Force (FATF) as either:

  1. a jurisdiction having strategic anti-money laundering or
    combating the financing of terrorism deficiencies to which counter
    measures apply (such as Syria, UAE, and Cayman
    Islands)5; or

  2. a jurisdiction that has not made sufficient progress in
    addressing the deficiencies or a jurisdiction that has not
    committed to an action plan developed with FATF to address the
    deficiencies (such as South Sudan and Myanmar).

There may be certain overlapping countries which are either a
signatory under IOSCO or have a bilateral MOU with SEBI (such as
UAE and Cayman Islands) and are also on the negative list detailed
above. In such cases, it is unclear whether investments in the
jurisdiction will be permitted.

Permitting reinvestment of proceeds from liquidation
of investments

The AIFs and VCFs are now permitted to reinvest the principal
amount out of the sale proceeds generated from the liquidation of
overseas investments, without requiring a fresh application to SEBI
for allocation of investing limits. This would however be subject
to the fund documents permitting such reinvestment.


If an AIF has received approval from SEBI and has invested USD
500,000 (US Dollars Five Hundred Thousand) in an overseas investee
company and this investment has been liquidated for USD 1,000,000
(US Dollars One Million) after some years, then the AIF can use the
sale proceeds from such disinvestment and reinvest the principal
amount of up to USD 500,000 (US Dollars Five Hundred Thousand)
already allocated to it, in another overseas investee company and
not the entire sale proceeds of USD 1,000,000 (US Dollars One

AIFs are permitted to invest up to 25% of their investible funds
overseas, subject to the overall limit permitted by SEBI.
Therefore, it should be interpreted that the quantum of 25% of the
investible funds will be calculated on an ongoing basis by the

Sale of overseas investment to persons eligible to
make overseas investments under FEMA

It is also important to note that AIFs and VCFs are permitted to
transfer or sell the investment in an overseas investee company
only to those persons who are eligible to make overseas
investments, as per the guidelines issued under the Foreign
Exchange Management Act, 1999 (FEMA). While the language suggests
that the overseas investments may be transferred to persons
resident in India, this however should not preclude the AIFs or
VCFs from transferring the investments to persons resident outside
India unless a new set of guidelines for sale of overseas
investments are expected from the RBI.

Part B – Compliances introduced for Overseas
Investments made by AIFs

The SEBI 2022 Circular prescribes the following additional
compliances to be complied with by the AIFs and the VCFs:

  1. AIFs and VCFs are required to file an application to SEBI for
    allocation of overseas investment limit in the prescribed format.
    This application has to be filed alongside undertakings from the
    trustee or the board or the designated partners of the AIFs or VCFs
    and the investment manager of the AIF or the VCF, in the format
    prescribed. It is interesting to note that while the investment
    managers of AIFs and VCFs take these decisions, trustee or the
    board or the designated partners of the AIFs or VCFs are also
    required to provide certain undertakings whilst making overseas
    investments which will bring them under the SEBI lens for scrutiny
    if and when required.

  2. AIFs and VCFs are required to furnish the details of sale or
    disinvestment of the overseas investments to SEBI in the prescribed
    format within a period of 3 working days of the

  3. All AIFs and VCFs are required to, within a period of 30 days
    from the date of this circular (i.e., 17 August 2022), report all
    the overseas investments which have been sold or disinvested by
    AIFs and VCFs since their inception.

The aforesaid reporting requirements will allow SEBI to monitor
and update the overall limits for overseas investment to all AIFs
and VCFs. Having said that, the timeline prescribed for reporting
disinvestment of the overseas limit is short and may be onerous on
the AIFs and VCFs to comply with, given that the RBI, under the
Foreign Exchange Management (Overseas Investment) Regulations,
2022, has prescribed a timeframe for reporting such disinvestments
to be 30 days from the date of receipt of disinvestment


In the recent months, there have been representations from the
funds industry to raise the limit on overseas investments by AIFs
and VCFs from the current limit of USD 1,500,000,000 (US Dollars
One and half Billion) as set by the SEBI 2021 Circular. However,
SEBI has not raised the overseas investment limit of the funds.

The reasons the limit has not been raised appears to be because
doing so may put a serious strain on the foreign exchange reserves
of India which have already fallen to reach their lowest in the
past one and half year and the Indian Rupee has seen a fall of more
than 7.5% in 2022. The fall in foreign reserves and the US Dollar
becoming more expensive compared to the Indian Rupee are also key
reasons why the provision for reinvestment of proceeds from
liquidation of overseas investment has been inserted. There is a
need for increasing the limit of offshore investments to a
particular AIF, within the industry-wide limit prescribed, as the
corpus of the AIF grows.

With the elimination of the requirement for an Indian connection
for overseas investments, the regulator has now taken a pragmatic
approach and aligned its objective with that of the fund management
industry (to boost returns for its investors) and in line with
global standards. This move will help facilitate investments
overseas by Indian AIFs.

This circular will significantly benefit the funds industry in
India as it permits Indian AIFs and VCFs to invest in an even wider
range of sectors overseas as earlier only companies in the tech
sector had the tendency to have frontend-backend structures.
Furthermore, the SEBI 2022 Circular seeks to boost India’s
credibility as a genuine and robust investment regime by
prohibiting investments in countries which are not FATF compliant
and permitting investments only in the countries where the relevant
market regulator is a signatory of IOSCO or has a bilateral MOU
with SEBI. This will increase the acceptance of Indian funds


1. SEBI Circular No. SEBI/VCF/CIR no. 1/98645/2007 dated
09 August 2007 (SEBI 2007 Circular) (accessed here), read with SEBI Circular No.
CIR/IMD/DF/7/2015 dated 01 October 2015 (SEBI 2015 Circular)
(accessed here).

2. Limit prescribed under Circular No.
SEBI/HO/IMD/DF6/CIR/P/2021/565 dated 21 May 2021 (SEBI 2021
Circular) (accessed here).

3. International Organization of Securities Commission,
IOSCO MoU: Appendix A (current signatories) – 127, accessed

4. Securities and Exchange Board of India, Bilateral
MOUs, accessed here.

5. FATF, Jurisdictions under Increased Monitoring – June
2022, accessed here.

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at

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