On June 7, the Reserve Bank of India issued a circular regarding overseas investments, permitting resident individuals and listed companies to invest in offshore funds managed by regulated fund managers. Earlier, the rules permitted investment only in foreign funds that were regulated.

The amended paragraph reads as follows: “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 [overseas portfolio investments]. Accordingly, in jurisdictions other than IFSCs [international financial services centres], listed Indian companies and resident individuals may make such investments. 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 import of this amendment is that Indian residents can now participate in overseas funds, provided the fund manager is regulated. This opens up more investment opportunities for Indians. 

Some experts, such as Ashima Obhan and Aastha Srivastava, of the law firm Obhan & Associates, have pointed out that in countries like the US and Singapore, it is the fund manager who is regulated and not the fund.

Until now, Indian investors could not invest in funds that were not regulated. Singapore-based funds offer attractive investment opportunities.

Obhan and Srivastava have noted in an article in Mondaq that the RBI circular also eliminates the ambiguity around the legal structure of ‘funds’. 

Now investments are not only allowed in “units” (as before) but also in other financial instruments such as shares.

“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 authors note.

The circular aims at the synchronisation of the overseas investment rules with various fund structures abroad. This enhances investment opportunities for Indians.

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Published on June 16, 2024