AIFs, VCs may get to invest in cos with no local presence

A recent circular by the Securities and Exchange Board of India on foreign investments by local alternative investment funds (AIFs) and venture capital firms is set to help many overseas companies that do not have a presence in India, as well as startups that are founded by Indians but headquartered abroad.

Sebi on Wednesday released guidelines for overseas investment by India-based AIFs and VCs and also articulated the reallocation limits under the investment route.

Industry trackers said many applications by AIFs for investment in foreign companies were stuck with the regulator as the overall limit provided by the Reserve Bank of India for such investments had got exhausted.

Under the circular, Sebi can also reallocate limits where past investments made under this window are disposed of.

"This change will allow room for more investments in foreign companies," said Bhavin Shah, partner, PwC India.

The new regulations also do away with the requirement that the investee companies should have some connection to India. This would mean India-based AIFs and VC funds can invest in companies that have no local presence.

"Both these changes are attractive for AIFs and will allow them more flexibility in investing abroad," said Shah.

"The circular gives us more flexibility as many of our companies are true multinationals. The circular will also benefit domestic LPs who can now indirectly own a share in global innovators through their investment in AIFs," said Prasad Ramaswamy, managing director of Zephyr Peacock India, the Indian investing wing of New York-headquartered private equity firm Zephyr Management. "This will expand investment opportunities for AIFs."

Many Indian startup promoters have taken their holding companies outside India in the past few years. This was more common among software product (SaaS) startups, according to industry trackers, as they have large client bases in the US, Europe or Southeast Asia.

Several Indian startups have been active on the SaaS front, creating alternatives for well-established software products, such as in customer relationship management. Some of these have presence in India through subsidiaries, but they want to raise capital in their holding company. Under the previous rules, VC funds would have found it difficult to invest in these businesses, said industry trackers.