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:

1. 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”).
2. 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 companya Limited Liability Partnership (LLP)a private trust
   They 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 sets 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, etc. 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.
3. 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.
4. 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 “persons resident outside India.”
5. 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.
6. Investment conditions: AIFs in IFSC shall be permitted to invest in the following:
7. Securities which are listed in IFSC
8. Securities issued by companies incorporated in IFSC
9. Securities issued by companies incorporated in India or companies belonging to foreign jurisdiction
10. Thus, such AIFs would be eligible to make investments in a wider range of securities.
11. Advantages: Major advantages of AIFs in the IFSC realm:
12. 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.
13. 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.
14. Apart from the 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.

Investment requirements: 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.

Permissible sectors: The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) currently prescribe 10 sectors in which FVCIs may invest, including:

• Infrastructure
• Biotechnology
• IT related to hardware and software

Further, FVCIs may invest in start-ups, as defined by the DPIIT pursuant to a notification dated April 11, 2018, irrespective of the sector.

Exemptions and relaxations:

• FVCIs are exempt from the pricing regulations with respect to both acquisition and sale of the securities in which they invest.
• 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.