Mumbai: Start-ups, high-risk small and medium enterprises (SMEs) and infrastructure companies may get better access to funds, with the Union Cabinet permitting easier foreign investments in alternate investment funds (AIFs) which invest in such firms.

The Cabinet, on Wednesday evening, approved foreign investments in AIFs that are set up under capital markets regulator Securities and Exchange Board of India (Sebi) regulations. AIFs include pooled capital vehicles such as private equity funds, venture capital funds and hedge funds.

Foreign investments will be allowed in AIFs that are established as a registered trust, incorporated company or a limited liability partnership.

The idea was first proposed by finance minister Arun Jaitley in this year’s budget.

Although Sebi rules provided for foreign investment in AIFs, the policy on foreign direct investment (FDI) and the Foreign Exchange Management Act (Fema) regulations did not mention any explicit terms on the same. AIFs are regulated by Sebi, while Fema regulations are under the Reserve Bank of India (RBI).

Experts believe the move will speed up the fund-raising process for private equity and venture capital funds. In the first half of 2015, private equity and venture capital funds invested $7.1 billion in Indian companies compared with $5.1 billion in the same period last year.

Sebi had earlier formed a committee to review AIF regulations and framework. “It (allowing easier foreign investments) has been part of the recommendation by the committee and it will definitely ease up the process for foreign investments in AIFs," said Siddharth Shah, partner – corporate and funds at Khaitan and Co.

Apart from large institutional foreign investors which invest in AIFs, the move will also benefit non-resident Indians (NRIs).

“One of the immediate beneficiaries of this move would be the strong NRI base which has been keen to invest in Indian AIFs. Now, this will not require prior Foreign Investment Promotion Board (FIPB) approval, which will have a positive spill-over impact," he added.

It is also hoped that the cabinet move will open up more funding avenues for the infrastructure sector, which is heavily dependent on the banking system for its funding needs. Infrastructure funds also fall under the AIF regulations of Sebi.

As of 31 March 2015, AIFs registered with Sebi raised 9,504 crore, while 7,356 crore has been invested by them since the AIF regulations took effect in 2012.

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