In the recent past, India has seen an influx of foreign investment into unlisted securities of Indian corporates.
To accommodate this steady inflow, Indian legislators have made significant modifications to the various
laws that govern routes of foreign investment that a foreign investor can access when investing in India.
Investments in unlisted shares of Indian entities are permissible under the following routes:
- Foreign Direct Investment (FDI)
- Foreign Venture Capital Investments (FVCI)
Some of the structures through these routes are discussed below: –
- Special Purpose Vehicle or Platform Investments: In the world of private equity (“PE”) investments
a popular structure for investments, is the Special Purpose Vehicle or “Platform” run by two or more
institutional investors together. Investments into “platforms” have become a very common model
for foreign investment into India. In the context of India deals, a transaction involving a platform
entity involves two or more investors pooling their investments together into a special purpose
vehicle (the “Platform”), and such Platform subsequently undertaking investments into an Indian
target or multiple Indian targets (“Target”).
- Alternative Investment Funds or AIFs: Alternative Investment Funds are privately pooled
investment vehicles governed by the SEBI (AIF) Regulations, 2012. However, with the advent of the
International Financial Services Centre (Fund Management) Regulations, 2022, the SEBI (AIF)
Regulations of 2012 along with various other circulars and regulations have been rendered
ineffective to the extent of their applicability to the International Financial Services Centre (IFSC).
As the name suggests (“alternative” investment funds) this kind of investment vehicle provides a
substitute for the more traditional forms of investments widely acclaimed in the market like mutual
funds, bonds, direct equity among others. The success of AIFs can be directly correlated to its
unaltered and unhindered state irrespective of the fluctuations in the public markets.
Legal structures for incorporation: These funds are established or incorporated in the IFSC as -a company, -LLP or -a private trust
and function by raising capital from individual and institutional investors, including both Indian and
foreign investors, with a primary focus on High Net-worth Individuals (HNIs), Ultra High Net-worth
Individuals (UHNIs) and other body corporates.
Categories
There are three distinct AIF Categories, which further cater to different set of investment
opportunities for the prospective investor in the market.
Category I: This includes venture capital funds, SME funds, social venture funds, infrastructure
funds or any other funds to target sectors like start-ups, early-stage ventures, social enterprises,Small and Medium Enterprises (SMEs), infrastructure and other areas recognized by the
Government regulators.
Category II: This encompasses investments in private equity funds, debt funds, funds of funds and
alike. This Category does not undertake leverage or borrowing other than to meet the day-to-day
operational requirements.
Category III: This category includes funds such as hedge funds and PIPE funds, involving a very
complex and strategic approach, which is often diverse and may involve leverage of tactics by
including investments in listed or unlisted derivatives.
AIF in IFSC, GIFT City, Gujarat
The International Financial Service Centre, or the IFSC established in
GIFT City, Gandhinagar, Gujarat operates under the Special Economic Zones Act of 2005 and holds
the exclusive status of being the only approved IFSC in India. GIFT City is designated as a Special
Economic Zone (SEZ), offering various benefits and incentives. Furthermore, within the territory of
IFSC, both “entities” and “units” are provided the classification of “person’s resident outside India.”
According to the provisions set out in the IFSC (FM) Regulations, 2022 or FM Regulations, any entity
intending to undertake fund management activities within the purview of the IFSC shall
compulsorily register itself as a Fund Management Entity (FME) in accordance with the
requirements laid down by the regulations. Upon an AIF’s registration under the FM Regulations,
such AIFs are authorized to launch a fund within 21 days following the submission of the Private
Placement Memorandum (PPM) to IFSC, provided that all IFSC observations are addressed.
Investment conditions: AIFs in IFSC shall be permitted to invest in the following: (i) securities which
are listed in IFSC; (ii) securities issued by companies incorporated in IFSC; (iii) securities issued by
companies incorporated in India or companies belonging to foreign jurisdiction. Thus, such AIFs
would be eligible to make investments in a wider range of securities
Advantages: Major advantages of AIFs in the IFSC realm :
-Tax Benefits – Investors shall consider the alluring taxation advantages provided by IFSC including
a 10-year tax holiday (a 100 per cent tax exemption) and GST exemptions. AIF managers are eligible
to receive these perks in relation to their income received against fund management income.
-Open gates for Foreign Investors and Cross Border Investments – Owing to the SEZ status, the core
objective of setting this IFSC was to promote and welcome trade and investment opportunities from
throughout the globe. The regulatory framework of the AIFs in IFSC is structured in a manner, which
promotes smooth registration of entities irrespective of nationality. By providing opportunities for
cross-border investments to entities or investors residing in the IFSC, AIFs have enabled such
investors to diversify their portfolio and increase chances of significantly higher returns.
Apart from FDI route, foreign investments in unlisted securities can be made into India via foreign venture
capital investments (FVCI):
Foreign venture capital investment (FVCI): An entity incorporated outside India may choose to seek
registration as a Foreign Venture Capital Investor under the Securities and Exchange Board of India (Foreign
Venture Capital Investors) Regulations, 2000 (“SEBI FVCI Regulations”) if it meets the eligibility criteria
prescribed by the regulations. Pursuant to the Securities and Exchange Board of India (Foreign Venture
Capital Investors) (Amendment) Regulations, 2024, entities are now required to apply for registration via a
Designated Depository Participant (“DDP”). DDPs have the authority to issue registration certificates on
behalf of SEBI and are required to dispose of the application for grant of registration within 30 days. An FVCI
is required to invest at least two-thirds of its ‘investible funds’ (i.e., funds committed for investment in India
net of administrative and management expenditure) in unlisted equity or equity linked instruments. The
Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) currently prescribe 10
sectors in which FVCIs may invest, including infrastructure, biotechnology and IT related to hardware and
software. Further, the FVCIs may invest in ‘start-ups’, as defined by the DPIIT pursuant to a notification
dated April 11, 2018, irrespective of the sector. FVCIs are exempt from the pricing regulations with respect
to both acquisition and sale of the securities in which they invest. Additionally, provided that an FVCI has
held the securities in a company for a period of six months, it is exempt from the six-month post-initial
public offer (“IPO”) lock in period, which applies to other non-promoter shareholders.
