Overseas funds: Indian investors go global as RBI eases norms

RBI norms for overseas funds
RBI's relaxed regulations empower Indian investors to diversify their portfolios with overseas funds.

The Reserve Bank of India has amended the rules regarding overseas portfolio investments, enabling Indian investors and companies to buy overseas funds. On Friday, the RBI issued a circular modifying the Foreign Exchange (Overseas Investment) Directions 2022, lifting several restrictions. Now, listed Indian companies and resident individuals can access funds, including those based in the United States and Singapore without any limitation.

Overseas portfolio investments (OPIs) are a strategic method for investors to broaden their financial exposure beyond domestic markets. This allows investors to tap into a variety of foreign financial assets, including equities listed on international stock exchanges, bonds issued by sovereign entities or corporations in other countries, and units within mutual funds or exchange-traded funds (ETFs) specialising in international investments.

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A key distinction between OPIs and foreign direct investment (FDI) lies in the level of control exercised by the investor. While FDIs often involve acquiring a substantial ownership stake in a foreign company, granting the investor significant influence over its operations, OPIs are characterised by a more passive investment style. Investors in OPIs acquire shares or bonds but typically do not have a direct say in the company’s decision-making processes. This characteristic also contributes to the relative liquidity of OPI holdings, as they can be readily bought or sold on financial markets.

OPIs have become increasingly attractive due to their potential exposure to emerging markets, offering higher growth potential that can enhance overall portfolio returns.

New RBI rules on overseas funds

With the new rules on OPIs, investors can choose any instrument, regardless of its form, and invest in funds set up as limited partnerships, LLCs, VCCs, companies, or trusts. Different asset classes such as real estate, private equity, and credit are also accessible now. The ambiguity surrounding the legal structure of the fund has been eliminated by the new regulations.

The lifting of restrictions means there will be a wider pool of overseas funds available, even if those funds are not directly regulated by the host country’s financial regulator but managed by registered and regulated investment managers. For instance, regulators in Singapore and the US regulate the fund manager rather than the fund. Previously, Indian Limited Partners (LPs) could only invest in units issued by overseas funds.

Benefits of Singapore-domiciled funds

Singapore-domiciled funds are quite attractive to investors due to the country’s global fund management expertise and reputation as a world-class, stable investment jurisdiction. Due to a highly restricted investing environment, new funds were created in locations like the Cayman Islands, Mauritius, or GIFT City, to ensure that investment from Indian LPs would be possible. These locations were chosen specifically to allow investments from Indian LPs.

Now that the RBI has changed its previous mandate, General Partners have the freedom to establish their funds in jurisdictions with better commercial benefits without worrying about whether Indian investments would be permitted.

Previously, Indian investors faced hurdles when using the Liberalised Remittance Scheme (LRS) to transfer funds to VCC funds in Singapore. This was because authorised dealer banks were not comfortable approving such transfers, as VCCs themselves are not directly regulated by the Monetary Authority of Singapore (MAS). With the new regulations in place, experts expect a potential rise in LRS investments from India into VCC funds.

Advantages of VCCs

VCCs have become a popular option for offshore investments due to several advantages. They offer more flexibility compared to other structures, along with tax incentives, confidentiality, and other benefits. Additionally, the umbrella structure of VCCs allows for clear separation of assets and liabilities between individual sub-funds within the VCC.

Besides relaxing norms for Indian investors investing abroad, the government has also pushed to make India an attractive destination for global funds. Much like International Financial Service Centres (IFSCs) such as Dublin, Hong Kong, and Singapore, India has opened Gujarat-based GIFT City as a business district designed to cater to global and domestic enterprises. The smart city is witnessing steady success in moving offshore financial transactions and activities related to investments in and from India. Foreign portfolio investors are increasingly favouring GIFT City over established channels like Mauritius or Singapore, driven by GIFT City’s attractive tax benefits and streamlined business environment. 

As India’s stature as a global investment destination rises, GIFT City has the potential to become the world’s gateway for investing in India. This development aligns perfectly with India’s vision of establishing itself as a premier global hub for finance and technology.