The Reserve Bank of India (RBI) has recently broadened the scope for Indian companies and individuals seeking to invest in offshore funds, marking a significant policy shift. The updated regulations now permit investments in various instruments and fund structures such as limited partnerships, LLCs, VCCs, companies, or trusts.
Previously, the RBI’s guidelines restricted overseas portfolio investment (OPI) to regulated funds in their home jurisdictions, specifically limiting investments to ‘units’ of these funds. This constraint often limited Indian investors, as many offshore funds are structured as corporate entities or partnerships rather than traditional trusts.
The new framework addresses these limitations by allowing investments in a broader array of financial instruments and not just ‘units’. This update comes after authorized dealer banks faced challenges with the previous language of the overseas investment rules introduced in 2022, which had inadvertently restricted OPI into securities other than units.
The earlier restrictions also posed problems for Indian Limited Partnerships (LPs) who had committed capital before the 2022 framework was introduced. Many found themselves unable to fulfill their investment commitments if the funds were not directly regulated. This led to the establishment of new funds in jurisdictions like the Cayman Islands, Mauritius, or GIFT City to accommodate investments from Indian LPs.
Under the new RBI guidelines, general partners now have the flexibility to set up funds in commercially favorable jurisdictions without concern over the direct regulation of the funds. Jurisdictions like Singapore and the US often regulate the fund manager rather than the fund itself, which previously posed a problem for Indian investors.
Parul Jain, Head of Fund Formation at Nishith Desai Associates, emphasized the importance of this flexibility, noting that it opens the door for Indian investment into funds set up in locations like Singapore’s Variable Capital Company (VCC) and Delaware.
Moreover, Neha Malviya Kulkarni, Chief Growth Officer at SuperNAV, pointed out that this change would allow Indian advisory entities to involve their Indian employees in overseas funds, enhancing global investment opportunities.
The VCC structure is particularly appealing due to its flexibility, tax incentives, confidentiality, and the legal separation of assets and liabilities between sub-funds.
Additionally, the RBI has extended investment opportunities to unlisted Indian entities, allowing them to invest up to half of their audited net worth into funds registered in the International Financial Services Centre (IFSC) under the OPI route. This amendment is expected to boost fundraising in GIFT City and encourage more overseas investments.
This policy expansion by the RBI represents a significant step forward in facilitating and diversifying investment options for Indian companies and individuals on the global stage.
