Alternative Investment FundIndian Party Investment in AIF under Automatic Route

May 18, 20210

In the recent RBI Index Circular vide RBI/2021-22/38, A.P.(DIR Series) Circular No. 04 dated 12.05.2021 (“the Circular”), it has been declared that any contribution by a sponsor Indian Party (“IP”) towards an AIF (“Alternative Investment Fund”) set up in overseas jurisdiction, including IFSCs (“International Financial Service Centre”), in accordance with the laws of the host jurisdiction, shall be treated as an Overseas Direct Investment (“ODI”).

The Circular hereby allows an IP to set up an AIF in any overseas jurisdiction, subject to compliance being maintained with Notification No. FEMA 120/RB-2004 (“the FEMA Notification”), dated 07.07.2004, issued in respect of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 (“the FEMA Regulations”). Herein, the IP referred to is an Indian Party as defined under Regulation 2(k) of the FEMA Notification as follows:

“k. ‘Indian party’ means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank: –

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the ‘Indian party’”

With regards to an IP making investment/financial commitment in any entity that is engaged in the financial services sector, the Circular also brings to the attention, of Authorised Dealer (Category – I) Banks, Paragraphs A.3 (e) of the Master Direction No. 15/2015-16 on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (“the Master Direction”).

Paragraph A.3 (e) of the Master Direction defines “Direct Investment outside India” as any investment made by way of contribution towards capital or through subscription to the Memorandum of Association (“the MoA”) of any foreign entity or, alternatively, through the purchase of the existing shares of such foreign entity – whether through market purchase, private placement or purchase from stock exchange. However, the definition provided herein specifically excludes Portfolio Investment from its purview.

The Circular also highlights Paragraph B.6 of the Master Direction, as well as Regulation 7 of the FEMA Notification, both of which lay down the following four additional conditions that need to be complied with by all IPs making any investment and/or financial commitment towards any overseas entity which is engaged in the financial services sector:

  1. be registered with the regulatory authority in India for conducting the financial sector activities;
  2. has earned net profit during the preceding three financial years from the financial services activities;
  3. has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and
  4. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

It is also to be noted that Foreign Exchange Management (Transfer or Issue of any foreign security) Regulations, 2004 (“TIFS Regulations”) do not permit investment by an Indian Party into an overseas company affianced in the financial services sector
under automatic route.

Hence, this circular paves a way for setting up of a AIF in overseas jurisdictions, including IFSCs, under the automatic route provided it complies with Regulation 7 of the Notification FEMA 120/2004-RB.


With the AIF regime still being in a nascent stage, SEBI and RBI have been taking active steps to ensure maximum transparency in AIF transactions. By virtue of the present RBI Circular, the existing norms and regulations pertaining to AIF have been further strengthened, which latest trend has already been apparent from the other recent Circulars issued by the RBI in recent times. The conditions to be followed by the IPs investing or financially committing to any overseas AIF have been laid down clearly, and the applicability of the same has also been clarified herein.

Indian Parties can now set up AIF in overseas jurisdiction including Gift City.This move by the RBI is highly acknowledgeable as it strengthens the Indian Party’s investment by considering it as Overseas Direct Investment (ODI) in an automatic route. Gift city can be a game changer to boost the economy of India and further this move empowers them to attract more investment in the coming days.

Moreover, with increasing emphasis on inward as well as outward ODI in the global economy, the potential impact of the classification of such investment and/or financial commitment to an overseas AIF, including the influence of the laws of the host jurisdiction, can be expected to become a grey area with respect to India’s regulation of AIF.

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