Amendments to the Foreign Exchange Management (Overseas Investment) Directions, 2022

The Reserve Bank of India (“RBI”), via Circular No. 09, RBI/2024-25/41 A.P. (DIR Series) dated June 7, 2024 (the “Circular”), issued to all Category-I Authorised Dealer Banks, has enacted amendments to the Foreign Exchange Management (Overseas Investment) Directions, 2022 (the “ODI Directions”).

The amendments made are as follows:

1. The extant paragraph 1(ix)(e) (Overseas Portfolio Investment) within the ODI Directions, which delineates overseas portfolio investments, has been revised to encompass investments in any other instrument, regardless of nomenclature, issued by a duly regulated investment fund overseas. Previously, the provisions restricted overseas portfolio investment (“OPI”) to units issued by such investment funds, duly regulated, inclusive of sponsor contributions. Additionally, the Circular has appended an explanation to paragraph 1(ix)(e) clarifying the term ‘investment fund overseas, duly regulated.’ According to the amendment, an investment fund overseas shall also include funds whose activities are regulated by a financial sector regulator of the host country or jurisdiction through a fund manager.

2. Paragraph 24(1) (Overseas investment in an IFSC in India by a person resident in India) addressing OPI in an International Financial Services Centre (IFSC) in India by a person resident in India has been amended to incorporate investments in any instrument, irrespective of nomenclature, issued by an investment fund or vehicle in an IFSC.

Consequently, the Circular authorizes Indian limited partners (LPs) to invest in overseas funds regulated through their regulated investment managers, eliminating the prior requirement that investments could only be made in funds directly regulated by the host country’s financial regulator. Additionally, it removes the limitations on Indian LP investments being confined to units issued by overseas funds, thereby broadening the scope of investment instruments in fund vehicles.

With the RBI’s revised mandate, general partners now possess the flexibility to establish their funds in jurisdictions offering superior commercial advantages without concerns regarding the permissibility of Indian investments. This Circular aims to better align the Overseas Investment Framework with various fund structures abroad, thereby likely enhancing overseas investments and expanding opportunities for Indian entities. Furthermore, the amendments also provide flexibility concerning the legal form of the fund. Investments in any form of fund (for example, corporate bodies or partnerships) are now permissible. As OPI is no longer restricted to investments made solely into units of overseas funds, general partners can now establish funds as Limited Partnerships, Variable Capital Companies (VCC), body corporates, etc.

About the authors: Arindam Basu is a Partner and Shagun Singh is an Associatate at Poovayya & Co.

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