SEBI Provides More Leeway to Pooled Investment Vehicles: Drops “India Connection” Clause

NovoJuris , Team
Posted on Mon, 29 August 2022


The Security Exchange Board of India (“SEBI”) has issued Guidelines for overseas investment by Alternate Investment Funds (AIF) / Venture Capital Funds (VCF)   dated 17th August, 2022 (“Guidelines”) (available here) . These guidelines have been issued by SEBI in accordance with Regulation 12(ba) of the SEBI (Venture Capital Funds) Regulations 1996 and Regulation 15 (1) (a) of SEBI (Alternate Investment Funds) Regulations, 2012 which gives SEBI the power to issue conditions or guidelines for AIFs/ VCFs to invest in securities of companies incorporated outside India.


No Requirement of India connection


Prior to issuance of these Guidelines, the overseas companies were mandated, by the Guidelines for Overseas Investments by Venture Capital Funds dated 9th August, 2007 and Guidelines on overseas investments and other issues/clarifications for AIFs/VCFs dated 1st October, 2015, issued by SEBI, to have Indian Connection (e.g. company which has a front office overseas, while back office operations are in India) (“Indian Connections”)  if they wanted capital from pooled vehicles from India. This requirement essentially led the overseas investee company to have a front office overseas and have the back office in India. It was seen that having a mere subsidiary in India would satisfy SEBI for having an Indian Connection.

Now with the issuance of the Guidelines, SEBI has done away with the requirement of having an Indian Connection for the overseas entity in which the AIF or VCF was investing. This comes as a relief for AIFs and VCFs as they would have greater flexibility in maintaining their portfolios and ultimately make gains for its investors. However, this relaxation has been given by SEBI subject to conditions as described below.  


New Safeguards introduced

While SEBI has done away with the condition of having an Indian Connection, it has introduced new conditions which are as follows-

1.    Criteria for Investee company- AIFs/VCFs shall invest in an overseas investee company, which is incorporated in a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to the bilateral Memorandum of Understanding with SEBI.

2.    Compliance with FATF- AIFs/VCFs shall not invest in an overseas investee company, which is incorporated in a country identified in the public statement of Financial Action Task Force (FATF) as:


a.    a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or


b.     a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with FATF to address the deficiencies


3.    Event of Liquidation - If an AIF/VCF liquidates investment made in an overseas investee company previously, the sale proceeds received from such liquidation, to the extent of investment made in the said overseas investee company, shall be available to all AIFs/VCFs (including the selling AIF/VCF) for reinvestment.


4.    Compliance with FEMA- AIFs/VCFs shall transfer/sell the investment in overseas investee company only to the entities eligible to make overseas investments, as per the extant guidelines issued under the Foreign Exchange Management Act, 1999


5.    Reporting to SEBI – AIFs/VCFs shall furnish the sale/divestment details of the overseas investments to SEBI in the format given at Annexure B of the Guidelines (“Annexure-B”) within 3 working days of the divestment, by emailing to , for updating the overall limit available for overseas investment by AIFs/VCFs.


All the overseas investments sold/divested by AIFs/VCFs till date, shall also be reported to SEBI in the format given at Annexure B within 30 days from the date of this circular, by emailing to


6.    The Trustee/Board/Designated Partners of the AIFs/VCFs shall submit an undertaking to SEBI as specified at Annexure A of the Guidelines with respect to the proposed overseas investment.


Our Comments

The requirement of having an Indian Connection was existent due to the thought process of SEBI that there has to be a certain benefit for the Indian economy if its capital is being deployed overseas however, this restriction was creating barriers for AIFs since it was limiting the options of making investment. The requirement of having Indian connection was becoming redundant day by day since it was being fulfilled by creating subsidiaries in India which were not doing any significant activity in India but only acted as a back-office support. Now with the removal of this condition, investee companies will be relieved of any such obligation to create any subsidiary.

In addition, the Guidelines also provide for AIFs/VCFs to apply for allocation of overseas investment limit. Currently, the investment limit for AIFs/VCFs as prescribed by SEBI circular – Enhancement of overall limit for overseas investment by AIFs/VCFs dated 21st May, 2021 is USD 1500 million. It appears that SEBI is taking details of sale/divestment details of the overseas investments to update the overall limit available for overseas investment by AIFs/VCFs.

Contact us for a Solution

Contact us for more information about our services and how we can help


As per the rules of the Bar Council of India, we are not permitted to advertise or solicit work. By accessing and browsing through this website, all users agree and acknowledge that the content of this website is for informational purposes only and that there has been no form of solicitation, advertisement or inducement by NovoJuris Legal or its members, in any form. No information provided on this website should be construed as legal advice and NovoJuris Legal shall not be liable for consequences of any action taken by relying on the information provided on this website.