REGULATIONS RELATED TO OVERSEAS PE AND MUTUAL FUND INVESTMENTS

Anurag SinghalNitesh Rastogi

CONTENT Definitions and explanation: PE and MF Market Overview: India Regulatory Bodies concerning investments abroad FEMA Rules Regulations concerning

PE & VC investments Mutual funds Overseas Direct Investments

Angel Investors

Venture Capital

Private Equity

Debt investments

Mezzanine FinancingBreak Even PointReve

nues

Time

Seed Early Mid/expansion

Late/Mezzanine

Exit

DEFINITIONS

Private Equity: An asset class consisting of equity and debt in operating

companies not public traded on SXs Investment made by PE firm, VC firm or an angel investor

according to the goals and investment strategies Venture capital is financial capital provided to early stage,

high potential, high risk, growth startup companies Angel investment is capital provided by an individual for a

business start-up, usually in exchange of convertible debt or equity Mutual Fund: Professionally managed collective investment

vehicle that pools in money from many investors to invest in securities

PE AND MF INVESTMENTS IN INDIA AND ABROAD

PE activity in India

2011 (in USD bln) 2012 (in USD bln)

No of deals 531 551Quantum 14.8 10.2

Source: Bain PE report, 2013 and Fundsindia.com

• In 2012, 80% of the funding came from overseas investors

Top PE firms in India

ICICI VentureIDFCKKR

Blackstone

Top MFs in India

HDFC MFReliance MF

ICICI PrudentialBirla Sunlife

UTI

REGULATIONS AND GUIDELINES APPLICABLE

Private Equity

Angel investment

Mutual Funds

Alternative Investment

Fund,2012; VC 2007 SEBI regulations

Liberalised Remittance

Scheme

Mutual Fund guidelines SEBI,

2007

Foreign Exchange Management Act, 1999, RBI

VC & PE REGULATIONS VCs and PEs are governed by Alternative Investment Fund

(AIF) Regulations, 2012 by Security Exchange Board of India (SEBI)

AIF Regulations, 2012 by SEBI override Venture Capital Funds (VCF) Regulations, 1996

SEBI registered VCFs can make overseas investments according to RBI circulars dated April 30, 2007 and May 04, 2007

VCFs can invest in equity and equity linked instruments only of off-shore venture capital undertakings, subject to overall limit of USD 500 million

The allocation of investment limits would be done on ‘first come- first serve’ basis, depending on the availability in the overall limit of USD 500 million.

VC & PE REGULATIONS VCF must make the investment within 6 months after

approval after which the unutilized limit will be allocated to other VCFs

Investments would be made only in those companies which have an Indian connection (i.e. company which has a front office overseas, while back office operations are in India) and such investments would be up to 10% of the investible funds of a VCF

MUTUAL FUNDS

MF investments overseas guided by SEBI circular dated Sept 26 2007 and April 8, 2008

The aggregate ceiling for overseas investments is USD 7 billion, subject to a

maximum of USD 300 million per mutual fund The overall ceiling for investment in overseas ETFs that

invest in securities is USD 1 billion subject to a maximum of USD 50 million per

mutual fund The Mutual Fund shall appoint a Dedicated Fund Manager

for making overseas investments

• Do not usually invest abroad due to lack of expertise in outside markets• Invests in fund of funds or global ETFs

MFs can invest in ADRs/ GDRs issued by Indian or foreign companies Equity of overseas companies listed on recognized stock

exchanges overseas Initial and follow on public offerings for listing at recognized

stock exchanges overseas Foreign debt securities in the countries with fully convertible

currencies, short term as well as long term debt instruments with rating not below investment grade by accredited/registered credit rating agencies

Money market instruments rated not below investment grade Repos in the form of investment, where the counterparty is

rated not below investment grade; repos should not however, involve any borrowing of funds by mutual funds

MUTUAL FUNDS

MUTUAL FUNDS MFs can invest in

Government securities where the countries are rated not below investment grade

Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities

Short term deposits with banks overseas where the issuer is rated not below investment grade

Units/securities issued by overseas mutual funds or unit trusts registered with overseas regulators and investing in (a) aforesaid securities, (b) Real Estate Investment Trusts (REITs) listed in recognized stock exchanges overseas or (c) unlisted overseas securities, not exceeding 10% of their net assets

REGULATIONS RELATED TO ANGEL INVESTORS Liberalised Remittance Scheme

The scheme was announced in Feb 2004 by the RBI to liberalize and simplify forex facilities for resident individuals

Individuals (including minors) are allowed to remit up to USD 75,000 per FY i.e. April-March

Remittance is allowed for any permissible current or capital account transaction or a combination of both

Under capital account transactions individuals can acquire and hold immovable property or shares or debt instruments or any other assets

outside India without prior approval of the Reserve Bank.

REGULATIONS RELATED TO ANGEL INVESTORS

Remittance under the scheme is not available for following

For any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II (requires approval)

From India for margins or margin calls to overseas exchanges / overseas counterparty For purchase of FCCBs issued by Indian companies in the overseas secondary market For trading in foreign exchange abroad By a resident individual for setting up a company abroad Directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan Directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non co-

operative countries and territories” Directly or indirectly to those individuals and entities identified as posing significant risk of

committing acts of terrorism

REGULATIONS RELATED TO ANGEL INVESTORS The resident individual investors can retain

and re-invest the income earned on investments made under the Scheme

Remittance under this scheme is on a gross basis

The remittance under the Scheme is in addition to acquisition of qualification shares

OVERSEAS DIRECT INVESTMENTS It means investments, either under the Automatic Route or

the Approval Route, by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long-term interest in the overseas entity (setting up / acquiring a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).

The Indian Party can invest up to 100% of its net worth (as per the last audited Balance Sheet)

The above rule doesn’t apply for ODI by Navratna PSUs, ONGC Videsh Limited and Oil India in overseas unincorporated entities and incorporated entities, in the oil sector.

Real estate business and banking business are the prohibited sectors for overseas direct investment. Real estate business means buying and selling of real

estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges.

Investments in companies abroad dealing with financial services sector allowed, subject to conditions

Investment in Pakistan is prohibited. Investments in Nepal can be only in INR.

Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies.

OVERSEAS DIRECT INVESTMENTS

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY)

A) Prohibition on Direct Investment outside India

Save as otherwise provided in the Act, rules or regulations made or directions issued there under, or with prior approval of the Reserve Bank, no person resident in India shall make any direct

investment outside India; and no Indian party shall make any direct investment in a

foreign entity engaged in real estate business or banking business.

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY)

B) Permission for Direct Investment in certain cases

Subject to the regulations, an Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India.

The total financial commitment of the Indian party in JV/WOS shall not exceed 100% of the net worth of the Indian Party as on the date of the last audited balance sheet

The direct investment is made in an overseas JV or WOS engaged in a bonafide business activity

The Indian Party routes all transactions relating to the investment in a Joint Venture/Wholly Owned Subsidiary through only one branch of an authorised dealer to be designated by it

The Indian Party is not on the Reserve Bank’s Exporters caution list /list of defaulters to the banking system circulated by the Reserve Bank

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY)

C) General Permission for Investment in Equity of a Company Registered Overseas

A person, a listed Indian company or a mutual fund registered in India, may invest in

the shares of an overseas company which is listed on a recognised stock exchange and has in its name share holding of not less than 10% in any listed Indian company as on 1st January of the year of investment

 the rated bonds/ fixed income securities issued by companies at (a) , provided that

I. in the case of investment by a listed Indian company, the investment shall not exceed 25% of its net worth as on the date of its last audited balance sheet;

II. in the case of investment by a Mutual Fund, the investment shall not exceed the ceiling stipulated by Securities & Exchange Board of India (SEBI) from time to time;

III. every transaction relating to purchase and sale of shares of the overseas company or bonds securities shall be routed through the designated branch of an authorised dealer in India.

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY)D) Investment in Financial Services Sector

Indian party may make investment in an entity outside India engaged in financial services activities

Provided that the Indian party has earned net profit during the preceding three

financial years from the financial services activities is registered with the regulatory authority in India for

conducting the financial services activities has obtained approval from the concerned regulatory

authorities both in India and abroad, for venturing into such financial sector activity

has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY)E) Investment in a foreign security by swap or

exchange of shares of an Indian company An Indian Party may acquire shares of a foreign company, in

exchange of ADRs/GDRs issued to the latter in accordance with the scheme for issue of FCCBs and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993

F) Prior Permission of the Reserve Bank for Direct Investment by a Proprietary Concern in India A proprietary concern in India may apply to the Reserve Bank in

Form ODB for permission to accept shares of a company outside India in lieu of fees due to it for professional services rendered to the said company, provided that

the value of the shares accepted from each company outside India shall not exceed 50% of the fees receivable by the Indian concern from that company; and,

the Indian concern’s shareholding in any one company outside India by virtue of shares accepted as aforesaid shall not exceed 10%of the paid-up capital of the company outside India, whose shares are accepted

FEMA (TRANSFER OR ISSUE OF ANY FOREIGN SECURITY) Investment by Individuals

A Resident individual may apply to the Reserve Bank for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to the foreign entity.

Reserve Bank may, after taking into account, inter alia, the following factors, grant permission subject to such terms and conditions as are considered necessary: credentials and net worth of the individual and the nature

of his profession; the extent of his forex earnings/balances in his EEFC

and/or RFC account; financial and business track record of the foreign entity; potential for forex inflow to the country; other likely benefits to the country.

THANK YOU!