RBI’s new overseas investment regulations: A gamechanger for Indian investors

The new rules simplify investment and open global opportunities for Indian limited partners (LPs).

The key amendment in the circular relaxes restrictions for overseas portfolio investors (OPI). Previously, Indian LPs could only invest in “units of an investment fund”.

The updated guidelines now extend permissible investments to “any other instruments,” including shares, stocks, interests in firms, Limited Liability Companies (LLCs), fixed deposits, and more. This broadened scope enables Indian investors to engage in a wider array of financial instruments overseas.

The RBI has also amended the regulation pertaining to investment funds. Previously, Indian investors could only invest in funds directly regulated by the financial sector regulator of the host country. This restriction often excluded popular investment destinations like Singapore and certain US states, where funds are regulated through their fund managers rather than directly by financial regulators.

The amendment now includes funds regulated through their managers, widening potential investment destinations. This is particularly relevant for locations like Singapore, where the Monetary Authority of Singapore regulates fund managers, and some U.S. states with similar frameworks.

Investment conundrum

Before this circular, there was considerable confusion among authorized dealer bankers (AD bankers) and Indian LPs regarding the classification of investments in offshore funds. Offshore funds are typically structured as corporate entities issuing shares or interests in a firm, unlike trusts issuing units. This led to debates on whether such investments fell under permissible categories. The typical approach adopted by AD Banks was to authorize remittances only when the fund was directly regulated by the host nation.

The previous language of the OI Directions caused confusion among Indian LPs who had committed capital before the introduction of the OI Framework. They faced challenges in fulfilling obligations if the fund was located in a jurisdiction where the financial regulator didn’t directly oversee the fund but regulated the fund manager. Additionally, new funds had to be established in locations like the Cayman Islands, Mauritius, or GIFT City to ensure investments from Indian LPs.

The RBI’s amendment offers flexibility regarding investment jurisdictions and the legal forms of the funds. OPIs can now invest in various structures, including Limited Partnerships, LLCs, Variable Capital Companies (VCCs), and traditional companies. This change allows Indian investors to participate in a broader range of investment opportunities, aligning their strategies with global practices.

Further, these amendments impact carry and co-investment structures for employees of Private Equity Funds and Venture Capital Funds. The changes now allow employees flexibility in participating in the carry and investing alongside the fund, permitting a broader range of investment options.

The RBI has also expanded the types of Indian entities that can invest in special purpose vehicles (SPVs) set up in International Financial Services Centres (IFSC).

Previously, only resident individuals and listed Indian entities were permitted to make such investments. The new regulations now include “unlisted Indian entities,” significantly broadening the potential investor base for IFSC funds.

These relaxations represent a significant opportunity for Indian LPs to diversify their portfolios and capitalize on global investment opportunities. By aligning the OI directions with industry demands and international standards, the RBI has facilitated a more dynamic investment environment. This move is expected to empower Indian investors to engage more freely in global markets, fostering a more vibrant and competitive investment landscape.

Industry experts believe these changes will attract more Indian capital to global markets and enhance the competitiveness of Indian investors. Startups and business families looking to diversify their investments abroad are particularly likely to benefit from the clarity and flexibility.

The RBI’s circular marks a pivotal moment in the landscape of overseas investments for Indian LPs. By addressing long-standing ambiguities and extending the scope of permissible investments, the RBI has opened new avenues for wealth creation and international engagement for Indian investors. This regulatory shift brings Indian investment practices in line with global standards, offering a robust framework for the future.

Ajay Rotti is founder and CEO, Tax Compaas. Kirtan P. Shastri, manager, Tax Compaas, contributed to this article.