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MUMBAI :  

Multiple Indian funds have urgently petitioned the Securities and Exchange Board of India (Sebi) to ease the overseas investment cap for Alternative Investment Funds (AIF) to avoid missing out on deals but are facing a steep battle amid the sharp fall in the rupee in recent months, three people aware of the development said.

Overseas investments by Alternative Investment Funds (AIF) cumulatively hit the $1.5 billion threshold just last week, one of the people cited above said. Sebi allows 25% of an AIF’s investible corpus to be invested overseas at an individual level with a $1.5 billion cap at an aggregate level for all AIFs. This threshold was set in 2015 at $500 million with a rider that they are connected to Indian firms. The limit was raised in 2018 to $750 million and doubled to $1.5 billion in May 2021.

The markets regulator is also discussing raising the cap with the Reserve Bank of India (RBI), but there appears to be little appetite within the central bank because of the adverse impact it may have on the rupee, the people cited above said.

The rupee has weakened by 6% this year and ended trading at 79.17 to a dollar on Thursday.

Investors awaiting approvals for their deals include Blume Ventures, Exfinity Ventures, Ideaspring Capital, Pi Ventures, and 9Unicorns, the people cited above added.

“Many Indian Software-as-a-Service (SaaS) startups are incorporated in Delaware and have 100% subsidiaries in India. This necessitates a dollar investment, as the parent is outside India," said Shailesh Ghorpade, founding managing partner and chief investment officer at Exfinity Venture Partners.

“We now hear that due to declining forex reserves and high current account deficit, RBI is re-examining these remittances. If this happens, it will be a body blow to the startup industry," Ghorpade added, urging the regulators to reinstate the limit “at the least" and streamline the approval process.

In response to a query, Naganand Doraswamy, managing partner and founder of Ideaspring Capital, said that such limits make funds uncompetitive.

“A large percentage of product companies of Indian origin of late are domiciled outside of India as they sell to international markets. For AIF funds like Ideaspring, it is imperative to be able to invest in these startups to stay competitive. It is very detrimental for the ecosystem to have a collective threshold limit. Sebi and RBI should arrive at a mechanism to not have these limits as it severely impacts the startup ecosystem," Doraswamy added.

Other investors did not immediately respond to requests for comments on Thursday.

A person familiar with Sebi’s thinking acknowledged that there had been representations from AIFs to increase the $1.5 billion cap on overseas investments. “Sebi is consulting the Reserve Bank of India on this; however, the situation is unlikely to change soon since the rupee has depreciated," the person said.

Sebi and RBI did not respond to requests for comment.

Funds making overseas investments need to seek and receive Sebi approval. Most investors have always found the approval process tedious and time-consuming and have campaigned to make it automatic to avoid missing out on deals. The counterpoint so far has been that this will take more money out of India.

ranjani.raghavan@livemint.com

ABOUT THE AUTHOR

Ranjani Raghavan

Ranjani Raghavan writes about the Indian investment ecosystem with a focus on venture capital, private equity and startups. Outside of work, she enjoys sketching and birding. You can find her @ranjanir_
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