With RBI’s new regulations called Foreign Exchange Management which were passed on November 16th, venture capitalists can now relax and not scratch their head much over their future investments in India.
In India, the venture capitalists follow the rules of “Alternative Investment Funds” (AIF) which is regulated by SEBI. Till now, the venture capitalists were restricted to directly fund any retail or e-commerce company. As a solution, the venture capitalists would have Indian managers who would track the flow of the money, thus hinting that the money has flown from overseas.
In all the amendments which were made, Amendment to Regulation 5 is critical followed by Schedule 11.
The new amended regulation states, “A person resident outside India (other than an individual who is citizen of or any other entity which is registered / incorporated in Pakistan or Bangladesh), including an Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI) may acquire, purchase, hold, sell or transfer units of an Investment Vehicle.”
An ‘Investment Vehicle’ is an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts.
What does it mean?
This means, that any Indian resident living in any corner of the world can sponsor companies through Alternative Investment Fund without any limited percentage and its corpus from overseas funds. So, all the investments made by any Indian resident will now be considered domestic.
This step clearly welcomes investments from across the globe, still holding the banner of FDI though the back doors have been opened. Now any VC can get hold of an Indian resident,take a minimum share from him and open a fund under AIF. This new venture can then back any Indian company. Its clearly a win-win situation for VCs as well as the Government.[source]