The Securities and Exchange Board of India (Sebi) on Thursday allowed alternative investment funds (AIFs) through back offices or subsidiaries to invest in overseas companies that may not have ties to India.

The “India Connection” requirement is a significant hurdle in seeking regulatory approval to invest in overseas funds. Relaxation in this regard will help speed up the fund approval process and could significantly expand the range of investments that AIFs can make. For example, these funds will now be able to invest in foreign tech companies set up in developed markets such as the US, UK or Singapore, or companies set up abroad by non-resident Indians.

Siddarth Pai, the founding partner of 3one4 Capital, said: “The removal of ‘India Connect’ allows Indian AIFs to go global in stock picking and bring geographic diversity to their investment philosophy.”

According to Sebi’s notice on Monday, overseas companies must be from countries whose securities market regulators have signed a multilateral memorandum of understanding (MoU) with the International Securities Commission or a bilateral MoU with Sebi. These companies should not fall into areas identified by the Financial Action Task Force (FATF) as having strategic anti-money laundering or terrorist financing deficiencies or insufficient progress in addressing deficiencies.

Sebi said that if the fund liquidates its previous investments in the overseas investment company, the sale proceeds from the liquidation will be available for all AIFs and VCFs to reinvest in the overseas investment company’s investment universe.

It further stated that the AIF/VCF should provide Sebi with details of the sale/divestment of overseas investments within three working days of the divestment.

“The Sebi circular clarifies that the cost of overseas investments sold by AIF will be recalculated based on available and unused limits. This is expected to help clear some pending overseas investment applications,” said Tejesh Chitlangi, senior partner at IC Universal Legal.

The AIF’s $1.5 billion total overseas investment limit has been exhausted at some point, and the increase is subject to a nod from the RBI. As a result, experts say all AIF approvals for overseas investments are currently on hold.

“The overall limit for foreign investment has not been increased. Instead, SEBI has provided for reimbursing limits on the number of investments made in foreign investment firms that have been cancelled. Parul Jain, head of the fund formation at Nishith Desai Associates, said this might not be enough to meet the growing industry demand, exit timing issues, and not all investments may return entire capital.

In May 2021, Sebi raised the AIF’s overseas investment limit from $750 million to $1.5 billion. Sebi recently asked the RBI to double the limit further.

AIF’s commitments rose 42% to Rs 6.94 trillion in the past year, while investments rose 43% to Rs 3.11 trillion.