Progressive Move – Enhancement in the Overseas Investment Limits for AIFs and VCFs

With the rapid technology growth and the advent of multiple technology startups, India has been witnessing a high growth in the investment funds domain, ranging from fund-raising activity to active investments by funds. This has resulted in the need for the Indian government to release new directives and guidelines.

Based on the need to protect the interests of fund investors the Securities and Exchange Board of India (“SEBI”) has recently issued circular SEBI/ HO/IMD/DF6/CIR/P/2021/ dated May 21, 2021 (“Circular 2021”). Circular 2021 has enhanced the overall limit for overseas investment by Alternative Investment Funds (“AIFs”) and Venture Capital Funds (“VCFs”) to USD 1500 million.

Prior to this enhancement limit, the regulatory framework for investment by AIFs and VCFs was contained in the SEBI Circular dated August 9, 2007 [Circular No. SEBI/VCF/CIR. No.1/98645/2007] (“Circular 2007”), SEBI Circular dated October 1, 2015 [Circular No. CIR/IMD/DF/7/2015] (“Circular 2015”), and SEBI Circular dated July 3, 2018 [SEBI/HO/IMD/DF1/CIR/P/2018/103/2018] (“Circular 2018”) (together the “SEBI AIF Circulars”). Under the SEBI AIF Circulars, SEBI registered AIFs and VCFs were permitted to invest overseas, subject to an overall limit of USD 750 million. This limit has now been enhanced to USD 1500 million keeping in mind the requirements of the AIF and VCF industry in India.

Circular 2021 provides that apart from the enhancement of the overall limit all other terms and conditions specified in the aforesaid circulars remains unchanged. Thus, AIFs and VCFs continue to be governed by the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIFRegulations”), and the SEBI AIF Circulars.

As per Regulation 2(1)(b) of the AIF Regulations, “Alternative Investment Fund” is defined as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which is which is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Further, the following are not considered as AIFs under the AIF Regulation (i) family trusts set up for the benefit of ‘relatives‘ as defined under Companies Act, 2013, (ii) ESOP Trusts set up under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 or as permitted under Companies Act, 2013; (iii) employee welfare trusts or gratuity trusts set up for the benefit of employees, (iv) ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 2013.

Regulation 2(1)(Z) of the AIF Regulations defines “Venture Capital Fund” as an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and does include an angel fund as defined under theCircular No. CIR/IMD/DF/7/2015 AIF Regulations.

Presently, AIFs and VCFs are permitted to invest in equity and equity linked instruments only of Off-shore Venture Capital Undertakings subject to overall limit of USD 1500 million. Circular 2015 clarifies that “Offshore Venture Capital Undertakings” means a foreign company whose shares are not listed on any of the recognized stock exchange in India or abroad.

Circular 2015, provides guidelines on overseas investments by AIFs and VCFs. The important points under this circular related to overseas investment by AIFs and VCFs are as follows:

  1. SEBI registered VCFs desirous of making investments in off-shore venture capital undertakings are required to submit their proposal for investment in the format prescribed to SEBI and no prior approval of SEBI is required.
  2. Investment can be made only in those companies which have an Indian connection, such as a company which has a front office overseas, while back-office operations are in India
  3. Such investments shall not exceed 25% of the investible funds of the scheme of the AIF.
  4. The AIF / VCF shall not invest in a joint venture / wholly owned subsidiary while making overseas investments.
  5. The AIF / VCF shall adhere to regulations under the Foreign Exchange Management Act, 2000 and other guidelines specified by Reserve Bank of India (“RBI”) from time to time with respect to any structure which involves foreign direct investment under overseas direct investment route.
  6. The AIF / VCF shall comply with all requirements under RBI guidelines on opening of branches/subsidiaries / joint venture/undertaking investment abroad by non- banking financial companies, where more than 50% (fifty percent) of the funds of the AIF / VCF has been contributed by a single NBFC.

Accordingly, AIFs and VCFs registered with the SEBI are allowed to invest in overseas unlisted companies having front office overseas, while back-office operations are in India. This provision severely restricts the options available to the AIFs and VCFs to invest in entities overseas. Most companies in India looking to expand overseas do not just have a back office in India instead they have their substantial operations in India. Hence, this provision is unfavorable to both AIFs and VCFs alike. Further, the provision restricting AIFs and VCFs to invest in a joint venture / wholly owned subsidiary while making overseas investments requires further clarification.


Doubling the limit of overseas investment to USD 1500 million will definitely enable AIFs and VCFs to invest overseas and generate strong returns for their investors. This is a progressive move, given the advent of multiple technology startups establishing their businesses outside India, with back-end operations and branches in India. However, in addition to enhancing the overseas limits, in our view enabling provisions must be made which facilitate such investments by AIFs and VCFs instead of restricting them.

The article was first published in Axfait on June 14th, 2021 and authored by Ms. Mini Raman and Ms. Angelina Talukdar