The Private Equity Review: India

I General overview

With the global economy recovering after two years of the covid-19 pandemic, investments by private equity and venture capital investors in India stood at US$77 billion in 2021, almost 62 per cent higher than in 2020, when they stood at US$47.5 billion.2 The gap between 2021 and 2020 is almost 154 per cent after excluding the exceptional fundraise by the group entities of Reliance Industries Limited.3

India's GDP grew by 8.4 per cent in the second quarter (July–September) of fiscal year 2020–2021, compared to a 7.4 per cent contraction during the year 2020.4 The Organisation for Economic Co-operation and Development (OECD) estimates that in the third quarter of 2021, India enjoyed 12.7 per cent growth of its GDP. While the growth was visible across all sectors, eight sectors recorded more than US$1 billion in investments during the third quarter of 2021 itself with e-commerce receiving the highest value of investments of US$7.5 billion across 45 deals (which is also the highest quarterly value of investments in the sector) followed by the financial services sector that recorded US$3.5 billion across 62 deals and the technology sector with US$3 billion invested across 76 deals.5

As the demand for digitisation skyrocketed during the pandemic, India's start-up ecosystem has recorded investments of nearly US$36 billion.6 Until December 2021, there were almost 396 seed-stage deals aggregating to US$705.86 million and approximately 166 series A stage investments totalling US$1.67 billion. A major chunk of such fundraises comprised pre-IPO financing rounds in companies such as Zomato, Ola, Policybazaar and Paytm, with the top 10 deals totalling US$5.58 billion. Flipkart's US$3.6 billion pre-IPO round (which marked the re-entry of SoftBank, following its exit from Walmart in 2018) was followed by seven more investments by other investors (worth US$1 billion or more) in 2021.7 In addition, September 2021 recorded 10 large deals amounting to US$2.7 billion, including the US$570 million investment in Meesho Inc by Prosus Ventures, Softbank, B Capital and others. Alteria Capital raised US$243 million for its second venture debt fund in September 2021, which was the largest fundraise for the third quarter of 2021.

In terms of exits, 2021 witnessed US$43.2 billion worth of exits through initial public offerings, secondary sales (at US$14.4 billion across 56 deals) and strategic sales (at US$ 16.9 billion across 96 deals). In this regard, the technology sector recorded the highest value of exits in 2021 (US$17.4 billion across 39 deals compared to US$847 million across 10 deals in 2020). The year saw the venture cycle come full circle, particularly exits through initial public offerings of companies such as Zomato, PolicyBazaar, Paytm and Nykaa. General Atlantic, TA Associates, Temasek, Visa, March Capital and Clearstone Venture executed definitive agreements to sell their stakes in Billdesk for US$2.9 billion to the PayU, to make it the largest exit in the third quarter of 2021 and the largest exit in the financial services sector.

After a remarkable overall surge in 2021, the momentum is expected to continue in 2022. In January 2022 itself, India has strongly recorded US$3 billion of fundraises, with the highest being HDFC Capital Affordable Real Estate Fund raising US$1.9 billion for providing long-term, flexible debt capital across the lifecycle of real estate projects.8

i 2021 versus 2020

The year 2021 witnessed an all-time high of private equity and venture capital investments of US$77 billion in Indian companies, an increase of 62 per cent over the previous year. The total number of transactions were at 1,266 which is a jump of 37 per cent compared to the previous year.9

Fundraising by domestic/India-focused private equity investors rose to US$4.72 billion which was only marginally higher than the US$4.5 billion in the year 2020.10

ii Industry sector trends

Investments in 2021 were majorly geared towards sectors such as information technology, consumer technology, banking/financial services and healthcare sector constituting inflow of about 80 per cent of the total investment. The information technology and software-as-a-service sectors witnessed large-scale deals of US$100 million and more. Direct-to-customer companies such as Lenskart, Liciuos, Lifelong, Zivame and Wow Skin have received investors' attention with the market for such services expected to reach US$100 billion by 2025. The start-up ecosystem shows remarkable signs of development with major investments in unicorn companies (funded start-ups valued at US$1 billion or more) being led by general partners such as Softbank, Accel, Sequoia and Tiger Global. However, limited partners such as Temasek, Qatar Investment Authority, Abu Dhabi Investment Authority and CDPQ/Caisse de dépôt et placement du Québec exposed themselves to start-ups.11

iii Consumer, technology and financial services

Early-stage technology start-ups witnessed an increase in the focus of investors on account of the need for digitisation brought about by covid-19. Byju's was one of the highest valued unicorn companies with a valuation of more than US$15 billion. In addition, the technology start-up Bundl Technologies (Swiggy) raised nearly US$800 million in 2021. Some major investments took place in entities such as e-commerce companies (PharmEasy and Urban Company), fintech companies (Cred, Zeta and Groww), edtech companies (upGrad and Eruditus) and food-related technology companies (Licious).12

iv Real estate and infrastructure

In 2021, the Indian real estate sector attracted institutional investments of about US$4.3 billion from private equity funds, family offices, sovereign and pension funds, albeit a decline of 14 per cent compared to the previous year.13 The investment inflows into the real estate sector of India amount to US$3.3 billion between January to September 2021 amounting to nearly 50 per cent of the inflows in the entire 2020. The private equity investments in the third quarter stood at US$477 million, marking a dip of 45 per cent compared to the third quarter of 2020. Experts believe the temporary slo-down was on account of uncertainties related to the spread of covid-19.14

The investments in office sector and the commercial office sector constituted US$1.2 billion accounting to 31 per cent and US$4.8 billion amounting to 45 per cent, respectively, of the total investments in 2021. In the residential segment, the investments in the luxury segment amounted to 35 per cent of the total investment. While foreign private equity funds claimed the largest share in the investment volumes, the domestic funds also showed higher confidence in the sector since the steady recovery of the economy.15

v Healthcare and pharmaceutical

The first half of 2021 itself witnessed an increase in the private equity and venture capital investments in the healthcare and pharmaceutical sector, amounting to US$3.01 billion compared to US$1.72 billion in the previous year. These investments in 2021 were led by the Zydus AHL deal in May 2021 with US$398 million invested by various private equity investors along with Canada Pension Plan Investment Board, followed by investments in PharmEasy, Aragon Life Sciences, Manipal Health Enterprises and ZCL Chemicals.16

Private equity investors had infused US$583.82 million in the healthcare sector in the first five months of 2021 itself. This was a record high in the previous five years. Until then, the highest private equity investment took place in 2017 with the infusion of US$503 million across 18 deals.17 Such increase in the focus on the healthcare sector can be attributed to the needs arising in the healthcare and pharmaceutical sector on account of the spread of covid-19.

vi Early stage

India minted about 44 unicorn companies in the year 2021. The information technology sector dominated the list of such investments with a total of US$23.4 billion accounting for approximately 37 per cent of the overall value of investments in the year. Almost 25 deals took place in the fourth quarter of 2021. The start-ups in India notched up a record investment of almost US$36 billion as a result of the increased demand for digitisation following covid-19. Seed-stage investments totalled 396 deals worth US$705.86 million. In addition, series A investments amounted to nearly US$1.67 billion. The leading e-commerce company Flipkart and ed-tech company Byju's were the highest valued unicorns in India each with a valuation of more than US$15 billion.18

In addition, the Indian start-up ecosystem witnessed an increase in the size of the financing rounds compared to the investments in 2020. This was due to stepping up of risk capital funds to place bigger bets on high-growth companies at an early stage resulting in higher valuations of the companies increasing their value in the successive funding rounds.19 Analysts expect such flow in momentum to seep into the investment landscape of 2022 as well, especially in technology companies.20

vii Exits

The roundup report prepared by Indian Private Equity and Venture Capital Association – Ernst & Young recorded exits worth US$43.2 billion across 280 deals in the year of 2021, which was 57 per cent more than the previous highest of US$27 billion in 2018.21 The velocity and size of the deal activity (both investments as well as exits) escalated in the second half of 2021. These exits were made through secondary and strategic sales as well as initial public offerings. Most number of exits were accounted to strategic sales spread across 93 deals amounting to US$16.9 billion. Exits by way of secondary sales took place in 56 deals amounting to US$14.4 billion. In addition, the initial public offerings of companies such as Nykaa, Zomato and PolicyBazaar displayed exitability of Indian start-ups. The technology sector witnessed the highest value of exits in 2021.22

II Legal framework for fundraising

i Offshore structures

Foreign investors have always opted for a jurisdiction that provided tax neutrality to them with respect to their investments in India. Under the Indian tax regime, a non-resident investor is subject to tax in India if it receives or is deemed to receive income in India; or income accrues or arises or is deemed to accrue or arise in India. However, if the non-resident is based out of a jurisdiction that has entered into a double taxation avoidance treaty (DTA) with India, the taxation implications are nullified and the Indian income tax laws apply only to the extent they are more beneficial than the tax treaties. Accordingly, most India-focused funds are based out of either Singapore or Mauritius as a limited liability partnership (LLP) or a corporate entity. Further, the general partner (GP) and the investment manager, who set up and operate the investment vehicle, are located outside India.

ii Tax risks re offshore structures

To curb tax avoidance, the government introduced the General Anti-Avoidance Rule (GAAR), with effect from the financial year beginning on 1 April 2017. The introduction of the GAAR has provided the tax authorities with the ammunition to re-characterise a transaction or an arrangement such that it gets taxed on the basis of substance, rather than on its form. The consequences include investment vehicles being denied DTA benefits or reclassification of capital gains as any other income, or a combination of these. In addition, the government amended the criteria for determining the tax residence of offshore companies by introducing the place of effective management (POEM) guidelines, with effect from 1 April 2017. According to the POEM guidelines, if the key management and commercial decisions that are necessary to conduct the business of any entity as a whole are, in substance, made in India, an offshore entity could be construed as being tax resident in India.

The past years also witnessed India renegotiating its DTA agreements with Singapore and Mauritius, making these less attractive as fund jurisdictions. The details of these changes along with an analysis on the future of these countries as viable fund jurisdictions is set out in detail in Section

India has also ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), pursuant to which several of its DTA agreements now include anti treaty abuse rules.

iii Rise of unified structures with direct investment by LPs

The fear of tax exposure owing to the various changes set out above has led to investors exploring unified structures or co-investment structures. Under the unified structure, both domestic and foreign investors make their investments into a domestic pooling vehicle. These unified structures received a huge impetus in 2015.

Until 2015, these investment vehicles were heavily funded by domestic investors because prior permission from the Foreign Investment Promotion Board was required if the overseas funds intended to directly invest in a privately pooled vehicle in India. To increase the participation of offshore funds in these investment vehicles, since November 2015, the Reserve Bank of India (RBI) has permitted such investment vehicles to receive investments from non-resident Indian investors and foreign investors through the automatic route, as long as control of the investment vehicles vests in the hands of sponsors and managers, or investment managers, that are considered Indian-owned and controlled under the extant foreign regulations; investments by Indian-controlled alternative investment funds (AIFs) with foreign investment are thus deemed to be domestic investments.

iv Legal framework of domestic funds

Alternative investment funds

Prior to private equity capital gaining popularity, entrepreneurs relied heavily on loan capital raised from banks and financial institutions, public issuances and private placements. Realising the potential role of PE funds and the value addition they would contribute to the growth of corporate entities, the Securities and Exchange Board of India (SEBI) introduced a set of regulations governing investments by VC investors. This was followed by an overhaul in the regulations in 2012 with the introduction of the SEBI (Alternative Investment Funds) Regulations 2012 (the AIF Regulations) to regulate privately pooled investment vehicles that collect funds from investors on a private placement basis. The AIF Regulations replace the earlier regulatory framework of the SEBI (Venture Capital Funds) Regulations 1996, which covered funds that primarily invested in unlisted VC undertakings.

Under the AIF Regulations, an AIF is a privately pooled investment vehicle incorporated in the form of an LLP, trust or body corporate, which collects funds from Indian and foreign investors for investments in accordance with a defined investment policy for the benefit of its investors.

Based on the nature of the funds and their investment focus, the AIF Regulations categorise funds into Category I AIF,23 Category II AIF24 and Category III AIF.25 These categories of funds must also comply with distinct investment conditions and restrictions during their life.

The AIF Regulations prescribe, inter alia, a cap of 1,000 on the number of investors pooling into a scheme of the AIF, conditionality on the minimum corpus for the fund and a minimum amount to be invested by an investor. To align the interests of the investors and the promoters or sponsors of the fund, the sponsor or manager of the AIF is required to have a continuing interest in the AIF throughout the life of the AIF. Further, investment by the sponsor or manager of a Category I AIF or Category II AIF has to be at least 2.5 per cent of the corpus (at any given point) of the AIF or 50 million rupees, whichever is lower. The continuing interest in the case of a Category III AIF has to be at least 5 per cent of the corpus or 100 million rupees, whichever is lower.

Before commencing operations, AIFs should register with SEBI, which takes about four to six weeks. An AIF can be set up in the form of a trust, a company, an LLP or a body corporate. Most funds in India opt for the trust structure. The entities involved in the structure are a settlor, a trustee and a contributor. The settlor settles the trust with a small amount as an initial settlement. The trustee is appointed to administer the trust and is paid a fee in lieu of such services. The investor signs up to a contribution agreement or a subscription agreement to make a capital commitment to the fund.

In 2021, SEBI introduced certain major amendments to streamline fundraising activities and provide robust investor protection framework pertaining to the AIFs. These include:

  1. permitting AIFs to invest in an investee company, directly or through other AIFs, subject to diversification limits of (i) 25 per cent (of investible funds) for Category I and II AIFs; and (ii) 10 per cent (of investible funds) of Category III AIFs. Accordingly, AIFs can make investments into portfolio companies directly and also act as funds of funds at the same time;
  2. imposing a requirement on the AIFs to file the private placement memorandum (PPM) and any subsequent changes to the PPM through registered merchant bankers. Such action has been undertaken to ensure that a third party verifies the contents of the PPM before it is filed with SEBI and circulated to the investors. However, it will have a negative impact on the time and costs involved in launching of AIFs; and
  3. providing a definition of 'start-up' for more clarity on the investee companies in relation to angel funds since such funds are permitted to invest in 'venture capital undertakings' and 'start-ups'.26

Sector-focused fund structures

Real estate investment trusts and infrastructure investment trusts

In 2014, SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014 (the REIT Regulations) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (the Infrastructure Regulations) to regulate investments in the real estate and infrastructure sectors respectively. An infrastructure investment trust (InvIT) and a real estate investment trust (REIT) must register with SEBI to conduct their business.

A REIT is a trust formed under the Indian Trust Act 1882 (the Trust Act) and registered under the Registration Act 1908 with the primary objective of undertaking the business of real estate investment in accordance with the REIT Regulations and has separate persons designated as sponsor,27 manager and trustee. The REIT is created by the sponsor of the trust, the trustee oversees the entire REIT and ensures all rules are complied with, and the beneficiaries are the unitholders of the REIT. The parties involved in the establishment of the REIT are: (1) the sponsor; (2) the trustee; (3) the investment manager and (4) the valuer. Each sponsor of a REIT is required to have a net worth of not less than 250 million rupees and a collective net worth of not less than 1 billion rupees. The sponsor should have not less than five years' experience in the development of the real estate sector. The trustee is the owner of the REIT assets, which it holds for the benefit of the unitholders, and it oversees the activities of the manager. The investment manager enters into an investment management agreement with the trustee and makes the investment decisions for the REIT. The responsibility of the valuer is to conduct half-yearly and annual valuations of the REIT's assets. The REIT Regulations impose a restriction on a REIT to invest only in its holding company, special purpose vehicles (SPV) or properties or transfer development rights in India or mortgage-backed securities. A REIT is allowed to make an initial offer of its units only through a public issue. No such offer can be made unless the offer size is at least 2.5 billion rupees and the value of the assets is not less than 5 billion rupees.

Akin to a REIT, an InvIT is a trust formed under the Trust Act and registered under the Registration Act. The InvIT is created by the sponsor of the trust, the ownership of the property vests in the trustee and the beneficiaries are the unitholders of the InvIT. It should be ensured that no unitholder of an InvIT enjoys superior voting rights or any other rights over another unitholder. Further, the Infrastructure Regulations prohibit multiple classes of units of InvITs. The Infrastructure Regulations require that an InvIT must hold not less than 51 per cent of the equity share capital or interest in the holding company or project SPVs. The parties involved in the establishment of the InvIT are: (1) the sponsor; (2) the trustee; (3) the investment manager; and (4) the project manager. The sponsor is responsible for the creation of the trust. The trustee is the owner of the InvIT assets, which it holds for the benefit of the unitholders. While the investment manager makes the investment decisions for the InvIT, the project manager is responsible for achieving the execution or management of the project in accordance with the Infrastructure Regulations. The Infrastructure Regulations further require that the investment manager, in consultation with the trustee, is required to appoint the majority of the board of directors or governing board of the holding company and SPVs.

Both Infrastructure Regulations and the REIT Regulations include conditions on investment and borrowing powers, the process for listing and trading of units, net worth and experience requirements, rights and obligations of different entities involved and the valuation of assets and the distribution policy.

In 2017, the RBI permitted banks to participate in REITs and InvITs within the overall ceiling of 20 per cent of their net owned funds for direct investments in shares, convertible bonds or debentures, units of equity-oriented mutual funds and exposure to venture capital funds (VCFs) both registered and unregistered, subject to the following conditions: (1) the banks must have put in place a board-approved policy on exposure to REITs or InvITs specifying the internal limit on such investments within the overall exposure limits in respect of the real estate sector and infrastructure sector; (2) not more than 10 per cent of the unit capital of a REIT or InvIT can be invested by the banks; and (3) the banks must adhere to the prudential guidelines of the RBI, as applicable.

In October 2019, the RBI further permitted banks to lend funds and extend credit facilities to InvITs subject to certain conditions, including: (1) the banks must have adopted a board-approved policy on exposures to InvITs specifying, inter alia, the appraisal mechanism, sanctioning conditions, internal limits and monitoring mechanism; (2) the banks can only lend to such InvITs where none of the underlying SPVs, having existing bank loans, is facing a 'financial difficulty'; (3) bank finance to InvITs for acquiring equity in other entities will be subject to the RBI guidelines, as applicable; and (4) the banks must undertake an assessment of all critical parameters to ensure timely debt servicing. Such availability of credit to InvITs is a welcome move as it will encourage investments into and by InvITs.

In November 2018, SEBI amended the guidelines for public issues of REIT and InvIT units with a view to further rationalising and easing the issue process. The year 2019 witnessed further amendments to the REIT Regulations and Infrastructure Regulations. Some of the key changes include a reduction in the minimum subscription from any investor in any publicly issued InvIT from 1 million rupees to 100,000 rupees. In the case of a publicly listed REIT, the minimum subscription amount has been reduced from 200,000 rupees to 50,000 rupees. In addition, the minimum trading lot has been reduced from 500,000 rupees to 100,000 rupees. Prior to the 2019 amendments, the aggregate consolidated borrowings and deferred payments of a listed InvIT, its holding company and SPVs were capped at 49 per cent of the value of InvIT assets, which restricted the ability of InvITs to make further acquisitions and provided for limited returns as compared to AIFs. Such limit has now been increased to 70 per cent of the value of InvIT assets subject to certain conditions such as obtaining a prior approval of 75 per cent of the unitholders and utilisation of funds only for the purpose of acquisition or development of the infrastructure projects or real estate projects. Unlisted private InvITs received a relaxation of the rules in terms of the minimum number of investors, which is now at the discretion of the InvITs (capped at 20 members). The leverage limit of these private InvITs needs to be specified under the trust deed (in consultation with the investors). In June 2020, SEBI amended the REIT Regulations and the Infrastructure Regulations with a view towards enhancing the ease of doing business in India. One of the key amendments permitted sponsors of InvITs and REITs, whose units have been listed for a period of three years to de-classify themselves (i.e., cease to be a sponsor), subject to the approval of the unitholders of the relevant InvITs and REITs. This amendment will effectively allow the persons identified as sponsors to step down from such position subject to fulfilment of certain conditions. Another key change relates to change or change of control of the sponsor or the inducted sponsor of an InvIT or REIT, which now requires approval of 75 per cent of the unitholders of the relevant REIT/InvIT (by value) excluding the value of units held by parties related to the transaction. In the event such approval is not obtained, the inducted sponsor or sponsor needs to provide an exit to the dissenting unitholders by purchasing their units. In addition, the term 'change in sponsor' has been defined to mean any change because of the entry of a new sponsor, whether or not the existing sponsor has exited. This amendment effectively grants additional protections in relation to the rights of unitholders of just investment trusts. Currently, there are 15 InvITs28 and three listed REITs.29

v Steps to popularise domestic funds as fund structures

Over the past year, the government has taken steps for mobilising domestic capital from banks, mutual funds and insurance companies. In fact, the Alternative Investment Policy Advisory Committee in its report submitted on 19 January 2018 recommended the use of domestic funds as they currently constitute only a minor percentage of the total funds invested annually. Under a domestic fund structure, the fund vehicle (typically a trust entity registered with SEBI as an AIF) is treated as tax pass-through subject to certain conditions. The income earned is taxable in the hands of the investors directly. Further, the characterisation of income in their hands is the same as that realised or distributed by the investee company to the fund. On 3 July 2018, SEBI raised the cap for overseas investments in AIFs and VCFs from 36,457.7 million rupees to 54,686.6 million rupees. Investments in AIFs in 2019 rose 53 per cent over 2018, to 1.4 trillion rupees.30 Further, a restriction on allocating foreign portfolio investors (FPIs) to more than 50 per cent of the securities in a single debt issuance prompted FPIs to use the AIF route to make debt investments into India. In 2020, despite the pandemic-led disruptions, AIFs raised commitments worth more than 350 billion rupees in the first half of the financial year ending on 31 March 2021 (majorly by Category II AIFs), which is marginally more than the amount raised in the year-ago period.31 As of financial year ending on 31 March 2021, the commitments raised by AIFs increased by 22 per cent and the funds raised by AIFs went up by 23 per cent.32

vi Preferred jurisdictions for offshore funds


The primary driver that determines the choice of jurisdiction for setting up India-focused funds is a domicile that has executed a DTA with India. Currently, India has separate DTA agreements with various countries, such as Ireland, Mauritius, the Netherlands and Singapore. The Netherlands has been a popular jurisdiction primarily with portfolio investors. This is because the capital gains tax benefit is available to Dutch entities on sale of shares of an Indian company to a non-resident and, on sale of such shares to an Indian resident as long as they hold less than 10 per cent of the shares of such Indian company.

Over the years, Mauritius has been one of the most favoured destinations to set up India-focused funds and accounts for more than 30 per cent of the foreign investment into India. This is because India's DTA with Mauritius that provided a capital gains exemption, on sale of shares of an Indian company. While the India–Singapore DTA had a similar exemption, it was subject to satisfaction of certain conditionalities, popularly known as the limitation-of-benefits clause.

Recent treaty changes

The DTA between India and Mauritius was amended on 10 May 2016 pursuant to a protocol signed between the respective governments (the Mauritius Protocol). Pursuant to the Mauritius Protocol, the capital gains tax exemption is being phased out and any capital gains arising from sale of shares (acquired after 1 April 2017 and transferred after 31 March 2019) will be taxable in India at the full domestic rate. Further, shares acquired after 31 March 2017 and transferred before 31March 2019 will be taxed at 50 per cent of the domestic tax rate of India subject to certain conditions. This phasing out of the capital gains exemption is only applicable to sales of shares and not sales of debentures. Accordingly, sales of debentures continue to enjoy tax benefits under the India–Mauritius DTA, making Mauritius a preferred destination for debt investments.

Further, prior to the Mauritius Protocol, India did not have the right to tax any residuary income of a Mauritian tax resident arising in India. The Mauritius Protocol has now enabled India to tax 'other income' arising from a Mauritian tax resident in India. In addition, the Financial Services Commission of Mauritius has introduced domestic substance rules to determine whether Mauritius-based entities are managed and controlled in Mauritius. India and Mauritius have also agreed to assist each other to collect revenue claims, upon a request from each other's revenue authorities. All such measures, viewed cumulatively, signal India's serious resolve to curb tax avoidance.

The amendments to the India–Mauritius DTA have made it a significantly less popular destination for making investments. Taking its cue from the Mauritius Protocol, the respective governments of India and Singapore signed a protocol amending the India–Singapore DTA on similar lines, introducing source-based taxation for capital gains arising upon transfer of shares (acquired on or after 1 April 2017).

Singapore or Mauritius

Although Singapore is no longer a relevant jurisdiction for investors seeking to take advantage of tax arbitrage, Singapore is taking various steps to attract foreign investors, including by introducing the concept of a Singapore variable capital company (SVCC) to be used as a vehicle for investment. The SVCC is expected to simplify the process of redemption of open-ended funds. Currently, the redemption of open-ended funds is a long, drawn-out process involving drawing up of accounts, audit and issuance of a solvency certificate. Singapore also enjoys an edge over Mauritius because of its outstanding banking facilities, access to financial products and better talent, thus causing a shift of funds from Mauritius to Singapore.

vii Investment route for offshore funds

Foreign direct investment route

Investors typically route their investments in an Indian portfolio company through a foreign direct investment (FDI) vehicle if the strategy is to play an active part in the business of the company. FDI investments are made by way of subscription or purchase of securities, subject to compliance with the pricing guidelines, sectoral caps and certain industry-specific conditions. Such investments are governed by the rules and regulations set out under the FDI consolidated policy (the FDI Policy), which is issued every year by the DPIIT of the Ministry of Commerce and Industry, and the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (the NDI Rules). The NDI Rules supersede the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2017. While the changes introduced in the NDI Rules were originally not substantial, many changes have been pushed through individual amendments since its notification. Under the NDI Rules, in line with the erstwhile regulations, any investment of 10 per cent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed company will be reclassified as an FDI. In addition, the NDI Rules stipulate that the pricing of convertible equity instruments is to be determined upfront and the price at the time of conversion should not be lower than the fair value at the time of issue of such instruments.

The NDI Rules have been aligned with the SEBI (Foreign Portfolio Investors) Regulations 2019 (the FPI Regulations) to provide that an FPI may purchase or sell equity instruments of an Indian company that is listed or to be listed subject to the individual limit of 10 per cent (for each FPI or an investor group) of the total paid-up equity capital on a fully diluted basis or the paid-up value of each series of debentures, preference shares or share warrants issued by an Indian company. The aggregate holdings of all FPIs put together (including any other permitted direct and indirect foreign investments in the Indian company) are subject to a cap of 24 per cent of the paid-up equity capital on a fully diluted basis or the paid-up value of each series of debentures, preference shares or share warrants. Such aggregate limit of 24 per cent can be increased by the concerned Indian company to up to the sectoral cap or statutory ceiling (as applicable) by way of a board resolution and a shareholders' resolution (passed by 75 per cent of the shareholders).

Previously, any investment in excess of the sectoral caps or not in compliance with the sectoral conditions required prior approval of the Foreign Investment Promotion Board (FIPB). In furtherance of its announcement in 2017, the government abolished the FIPB in 2017. In place of the FIPB, the government has introduced an online single-point interface for facilitating decisions that would previously have been taken by the FIPB. Upon receipt of an application for an FDI proposal, the administrative ministry or department concerned will process the application in accordance with a standard operating procedure (SOP) to be followed by investors and various government departments to approve foreign investment proposals. As a part of its initiative to ease business further, the SOP also sets out a time limit of four to six weeks within which different government departments are required to respond to a proposal. More than three years on, there is very little information in the public domain about the proposals processed by the SOP.

FPI route

Foreign investors who have a short investment horizon and are not keen on engaging in the day-to-day operations of the target may opt for this route after prior registration with a designated depository participant (DDP) as an FPI under the FPI Regulations. The FPI Regulations supersede the erstwhile SEBI (Foreign Portfolio Investors) Regulations 2014 (the 2014 Regulations). The process of registration is fairly simple and ordinarily it does not take more than 30 days to obtain the certificate.

In 2014, to rationalise different routes for foreign portfolio investments and create a unified and single-window framework for foreign institutional investors, qualified institutional investors and sub-accounts, SEBI, the security watchdog, introduced the regulations on FPIs. In December 2017, SEBI, with the intention of providing ease of access to FPIs, approved certain changes to the FPI Regulations, which included: (1) rationalisation of fit-and-proper criteria for FPIs; (2) simplification of the broad-based requirement for FPIs; (3) discontinuation of requirements for seeking prior approval from SEBI in the event of a change of local custodian or FPI DDP; and (4) permitting reliance on due diligence carried out by the erstwhile DDP at the time of the change of custodian or FPI DDP. In addition, with a view to improve ease of doing business in India, a common application form has been introduced for registration, the opening of a demat account and the issue of a permanent account number for the FPIs.

In 2019, SEBI introduced the FPI Regulations, with certain important changes from the 2014 Regulations, including:

  1. the re-categorisation of FPIs into two FPI categories (rather than the three FPI categories under the 2014 Regulations);
  2. for investment in securities in India by offshore funds floated by an asset management company that has received a no-objection certificate under the SEBI (Mutual Funds) Regulations 1996, registration as an FPI will have to be obtained within 180 days of the date of the FPI Regulations;
  3. the broad-based requirement (where the fund was required to be established by at least 20 investors) for certain categories of FPIs has been done away with;
  4. the concept of opaque structure has now been removed from the FPI Regulations such that the entities that are incorporated as protected cell companies, segregated cell companies or equivalent structures, for ring-fencing of assets and liabilities, can now seek registration as FPIs under the FPI Regulations. Having said that, under the 2014 Regulations, where the identity of the ultimate beneficial owner was accessible, such entities could fall outside the scope of opaque structures and, hence, obtain registration as an FPI. Similarly, while the concept of opaque structures has been removed under the FPI Regulations, FPIs need to mandatorily comply with the requirement of disclosure of beneficial owners to the SEBI; and
  5. the total investment by a single FPI, including its investor group, must be below 10 per cent of a company's paid-up equity capital on a fully diluted basis. If this threshold is exceeded, the FPI needs to divest the excess holding within five trading days of the date of settlement of trades resulting in the breach. The window of five trading days allows FPIs to avoid any change in the nature of their investments. However, upon failure to divest the excess holding, the entire investment in the company by the FPI (including its investor group) will be treated as an FDI, and the FPI (including its investor group) will be restricted from making further portfolio investments in terms of the FPI Regulations.

The clubbing of investment limits for FPIs is done on the basis of common ownership of more than 50 per cent or on common control. As regards the common-control criteria, clubbing shall not be done for FPIs that are: (1) appropriately regulated public retail funds; (2) public retail funds that are majority owned by appropriately regulated public retail funds on a look-through basis; or (3) public retail funds whose investment managers are appropriately regulated. The term 'control' is understood to include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights, by shareholders' or voting agreements, or in any other manner.

Under the original FPI regime, Category I FPIs were restricted to those who were residents of a country whose securities market regulator was either a signatory to the International Organization of Securities Commission's Multilateral Memorandum or had a bilateral memorandum of understanding with SEBI. Hence, Category I FPIs were essentially governments and related entities or multilateral agencies and were perceived to be the highest-quality and lowest-risk investors.

Pursuant to the reclassification of FPIs, the entities that have been added to Category I, inter alia, are:

  1. pension funds and university funds;
  2. appropriately regulated entities, such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisers, portfolio managers, broker dealers and swap dealers;
  3. appropriately regulated funds from Financial Action Task Force member countries;
  4. unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI; and
  5. university-related endowments of universities that have been in existence for more than five years.

In addition, the Category II FPI includes all the investors not eligible under Category I, such as individuals, appropriately regulated funds not eligible as Category I FPIs and unregulated funds in the form of limited partnerships and trusts. An applicant incorporated or established in an international financial services centre (IFSC) is deemed to be appropriately regulated under the FPI Regulations.

Foreign venture capital investor route

The foreign venture capital investor (FVCI) route was introduced with the objective of allowing foreign investors to make investments in VC undertakings. Investment by such entities into listed Indian companies is also permitted subject to certain limits or conditions. Investment through the FVCI route requires prior registration with SEBI under SEBI (Foreign Venture Capital Investors) Regulations 2000 (the FVCI Regulations). Investment companies, investment trusts, investment partnerships, pension funds, mutual funds, endowment funds, university funds, charitable institutions, asset management companies, investment managers and other entities incorporated outside India are eligible for registration as FVCIs. One of the primary benefits of investing through the FVCI route is that FVCI investments are not subject to the RBI's pricing regulations or the lock-in period prescribed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.

Pursuant to the FVCI Regulations, FVCIs must register with SEBI before making investments. The process typically takes 20 to 30 days from the date of application. To promote job creation and innovation, the RBI allowed for 100 per cent FVCI investment in start-ups. In this regard, the NDI Rules also allow FVCIs to purchase equity, equity-linked instruments or debt instruments issued by an Indian start-up, irrespective of the sector in which it is engaged, subject to compliance with the sector-specific conditions (as applicable). Previously, only investment in the following sectors did not require prior approval of the securities regulator:

  1. biotechnology;
  2. information technology;
  3. nanotechnology;
  4. seed research and development;
  5. pharmaceuticals (specifically in terms of discovery of new chemical entities);
  6. dairy;
  7. poultry;
  8. biofuel production;
  9. hotels and convention centres with a seating capacity of over 3,000; and
  10. infrastructure.

III The Insolvency Code

In response to the covid-19 pandemic, the Indian government suspended the insolvency proceedings against the defaulting companies (i.e., companies that are unable to meet their payment obligations towards their creditors) until March 2021.33

Following the trend of changes and clarifications, 2021 witnessed certain amendments to the Insolvency Code and the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (the CIRP Regulations). With effect from 4 April 2021, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 to provide for a pre-packaged insolvency resolution process (IRP) for corporate persons classified as micro, small and medium enterprises because of the unique nature of their businesses and simpler corporate structures. This is expected to ensure quicker, and more cost-effective and value-maximising outcomes for all stakeholders. The pre-packaged IRP needs to be completed within 120 days from the date of admission of the application by the adjudicating authority. The ordinance was replaced by the Insolvency and Bankruptcy Code (Amendment) Act 2021 on 11 August 2021.

In addition, the IBBI has made substantive amendments to the CIRP Regulations, such as: (1) limiting modifications to the resolution plan to only one instance; (2) disallowance of resolution plans submitted beyond the specified period or by an unlisted applicant; and (3) the committee of creditors (CoC) has been brought under the purview of the IBBI as CoC is expected to comply with the prescribed guidelines.

Apart from the legislative amendments, the Insolvency Code was significantly shaped by verdicts passed by the Supreme Court of India. One of the key developments in the Insolvency Code is the Supreme Court's decision to uphold the constitutional validity of the central government notification dated 15 November 2019 that operationalised the provisions in respect of personal guarantors of the corporate debtor under the Insolvency Code. The notification was challenged on the basis that it, inter alia, amounts to impermissible and selective application of the Insolvency Code.

The impact of the Insolvency Code is evident from the improvement in India's ranking in World Bank's 'resolving insolvency index', moving up to 52nd position in 2020 from 108th position in 201934 and demonstrating a rise of 84 places.35

IV Solicitation, disclosure requirements and fiduciary duties

Typically, investment vehicles issue a PPM or an offer document to raise funds from prospective investors. The PPM sets out all material information to enable the investors to make an informed decision, including fund structure, summary of key terms, background of the key investment team, risk factors, disciplinary history and risk management tools in Category III AIFs.

In accordance with the AIF Regulations, managers and sponsors are beginning to set out the risk of their investments in relation to the minimum amount required to be invested. Because a PPM in India acts as both a marketing and a disclosure document, careful attention has to be paid while drafting the PPM to ensure a fine balance between regulatory requirements prescribed by SEBI and the marketing leverage that they want from their commitments to the fund.

With respect to offshore India-focused funds, the disclosure requirements, marketing guidelines and limits on solicitation are governed by the laws of the fund's domicile or jurisdiction. While there is no regulatory framework governing the marketing documents of offshore India-focused funds, under the AIF Regulations, AIFs are required to disclose certain financial information, including sharing valuation reports and filing the PPM with SEBI, for domestic funds. Further, there are limitations on the number of investors that an investment vehicle can attract. For instance, no AIF scheme (other than an angel fund) can have more than 1,000 investors.

Recognised as fiduciaries, directors of an investment vehicle are exposed to liabilities arising out of breach of their duties towards the fund and its stakeholders. Accordingly, directors should be mindful of their duties and exercise a supervisory role, during the entire cycle of a fund. For instance, at the time of fund formation, a director should ensure that the structure of the fund is tax-compliant, and that the information set out in the offer documents is not untrue or misleading. During the life of the fund, the directors should ensure policies regarding conflicts of interest are in place and adhered to. Similar principles are built into the AIF Regulations and the REIT Regulations, which require the sponsor and the manager to act in a fiduciary capacity towards their investors and disclose any potential conflicts of interest.

V Taxation

i Taxation of foreign funds

Following the adoption of the GAAR on 1 April 2017, the Indian tax authorities have the ability to treat arrangements outside India as an 'impermissible avoidance arrangement' if the main purpose of the arrangement is to obtain a tax benefit and the arrangement has no 'commercial substance'. Mere location of the entity in a tax-efficient jurisdiction will not invoke the GAAR. Accordingly, it is critical for a fund to demonstrate commercial reasons for setting up a fund in a particular jurisdiction. The steps that a fund may undertake to demonstrate commercial reasons include the renting of office space, and employment of personnel in that jurisdiction.

The other potential taxation risk in India for offshore funds is the risk of being perceived to have a permanent establishment in India on account of the fund's relationship with the investment advisory team based in India, in which case it would be liable to tax in India. As stated earlier, when determining POEM and actual residency status of an entity, the key guiding principle is, inter alia, to demonstrate that decision-making for the fund is being undertaken at the offshore fund level and not in India. To encourage fund management in India, the Finance Act 2015 provided for safe-harbour rules, where fund management activity carried out through an eligible fund manager in India by an eligible investment fund shall not constitute a business connection in India, subject to the fund and fund manager satisfying various restrictions, such as participation or investment by persons resident in India to be limited to 5 per cent, and a prohibition on the fund making any investment in its associate entity and carrying on or controlling and managing any business in India or from India.

ii Taxation of domestic funds

Category I and Category II AIFs enjoy a tax pass-through status. Accordingly, the income from investment is not taxed in the hands of such funds but is taxed in the hands of the unitholders. The taxation of Category III AIFs depends on the legal status of the fund
(i.e., company, limited liability partnership or trust). Accordingly, investment fund income, other than the business income, is exempt from tax and income received by or accrued to Category I and Category II AIF unitholders is chargeable to tax in the same nature and in the same proportion as if it were income received by or accrued to the unitholder had the investment been made directly by the unitholder. This amendment has provided long-awaited clarity to AIFs given that, prior to this amendment, AIFs were subject to trust taxation provisions that posed several tax uncertainties.

On similar lines, amendments were made to provide pass-through status to REITs and InvITs. Taxes are imposed on these in the manner set out below.

DividendExempt subject to conditionsExemptExempt
InterestNo withholdingExemptTaxable
Rental income (only applicable for REITs, not InvITs)No withholdingExemptTaxable
Capital gainsN/ATaxableExempt
Other incomeN/ATaxableExempt

Further, tax implications for different streams of income in the hands of the investors are set out below.


Hitherto, dividends declared by Indian companies attracted a dividend distribution tax at the effective rate of 20.56 per cent, with the dividends being tax exempt in the hands of shareholders. Considering the excessive tax liability on undistributed or distributed profits of a domestic company as well as on the investors, the government has, vide Finance Act 2020, abolished dividend distribution tax and adopted the classical system of dividend taxation. Now, dividend will be taxable in the hands of investors at the rates applicable to them under the relevant DTA. Non-resident investors will also be able to claim foreign tax credit of such withholding tax in their resident country, which otherwise may not have been available to them in the erstwhile regime.


Interest income is subject to tax in the hands of Indian resident investors at the rate that would otherwise apply to the investors on their ordinary income. Income from interest on debt ranges from 5.4 per cent to 43.68 per cent, depending on the regulatory regime, currency of debt and rate of interest.

Capital gains

Any short-term capital gain arising on the transfer of listed equity shares on any recognised stock exchange in India, where securities transaction tax is payable, is subject to tax at the rate of 15 per cent (plus applicable surcharge and cess) subject to any tax benefit under the relevant tax treaty. Sales off the market that result in short-term gain are subject to tax at the rate of 40 per cent (plus applicable surcharge and cess) in case of a foreign company, and 30 per cent (plus applicable surcharge and cess), subject to any tax benefit under the relevant DTA, and at the applicable marginal rate in the case of residents.

Any long-term gain on sale of listed securities is taxed at 10 per cent (plus surcharge and cess) in case of a resident and a non-resident. Further, any long-term gains on sale of unlisted securities are taxed at 10 per cent (plus surcharge and cess) in the hands of the non-resident and at 20 per cent (plus surcharge and cess) in the hands of resident (without the benefits of indexation and neutralisation of foreign exchange fluctuation).


With effect from 1 April 2020, any accumulated losses (in the nature of business loss) incurred by Category I or Category II AIFs will be passed to the investors who will be able to set these off against their income, provided that they have held units in the AIF for longer than 12 months. In addition, with effect from 1 April 2020, any accumulated losses (not in the nature of business losses) incurred by Category I or Category II AIFs prior to 31 March 2019 will be passed to the investors, subject to the condition that they held units in the AIF on 31 March 2019. Accordingly, such losses can be carried forward and set off by the investors against their income from the year in which the loss had first occurred, taking that year as the first year in accordance with Chapter VI of the Income Tax Act. However, such pass-through benefit of losses will not be available to investors who acquired units of AIFs on or after 1 April 2019.

Offshore investments

By way of a circular dated 3 July 2019, the Central Board of Direct Taxes has clarified that any income in the hands of a non-resident investor from offshore investments routed through a Category I or Category II AIF that is deemed a direct investment outside India is not taxable in India under Section 5(2) of the Income Tax Act. The circular further clarified that any exempt loss arising from the offshore investment by a non-resident investor may not be set off or carried forward against the income of the Category I or Category II AIF. This clarification essentially prevents double taxation of the non-resident investor's income in India and in its country of residence.


The Finance Act 2019 exempted taxation of income arising from the transfer of global depository receipts, rupee-denominated bonds and derivatives on a stock exchange in an IFSC, for non-resident investors of Category III AIFs, provided that the income is solely in the form of convertible foreign exchange and all units of the AIFs are held by non-residents (except for units held by the sponsor or manager). The scope of this exemption has been further expanded vide the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 by extending it to (1) income on transfer of any securities (other than shares in a company resident in India); (2) income from securities issued by a non-resident where such income otherwise does not accrue or arise in India; and (3) business income from a securitisation trust. This exemption is a positive step to boost offshore funding raising by Category III AIFs in an IFSC.

Additionally, a unit situated in an IFSC (as defined under the Special Economic Zones Act 2005) is exempt from tax on dividend distributed from income accumulated by such unit from its operations in the IFSC from 1 April 2017. Similarly, the distributions made by mutual funds located in IFSCs, which derive income solely in the form of convertible foreign exchange and all units of which are being held by non-residents, are tax exempt.

VI Regulatory developments

iAmendments to the AIF Regulations

SEBI has amended the AIF Regulations to provide that the 'manager' of the AIF is responsible for its investment decisions and that he may constitute an investment committee to approve such decisions, subject to the following conditions:

  1. the members of investment committee are equally responsible as the manager for investment decisions of the AIF;
  2. the manager and members of the investment committee need to, jointly and severally, ensure that the AIF's investments are in compliance with the AIF Regulations, the terms of the placement memorandum, the agreements made with the investor, any other fund documents and any other applicable law; and
  3. external members whose names are not disclosed in:
    • placement memorandum;
    • the agreement made with the investor; or
    • any other fund documents at the time of onboarding investors, can be appointed to the investment committee only with the consent of at least 75 per cent of the investors (by value of their investment in the AIF or scheme).

In addition, in order to be eligible for grant of a certificate of registration of the AIF, the key investment team of the manager of the AIF must, inter alia, have:

  1. at least one key personnel having not less than five years' experience in managing pools of capital or in fund or asset or portfolio management or in the business of buying, selling or dealing in securities or other financial assets and relevant professional qualifications; and
  2. at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognised by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the SEBI.

It is clarified that the requirements of experience and professional qualification specified under (a) and (b) above may be fulfilled by the same key personnel.

ii Amendments to the FPI Regulations

SEBI has amended the FPI Regulations to provide that a resident Indian, other than individuals, may also be constituents of the applicant (for certificate of registration as FPI), subject to certain conditions such as: (1) such resident Indian, other than individuals, is a sponsor or manager of the applicant; and (2) the contribution of such resident Indian, other than individuals, is to be up to 2.5 per cent of the corpus of the applicant or US$750,000 (whichever is lower), if the applicant is a Category I or Category II Alternative Investment Fund; or 5 per cent of the corpus of the applicant or US$1.5 million (whichever is lower), if the applicant is a Category III Alternative Investment Fund.

iii Foreign direct investment in the insurance sector

Pursuant to Press Note No. 2 dated 14 June 2021 issued by the Department for Promotion of Industry and Internal Trade (DPIIT) and amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (NDI Rules), the investment cap on foreign direct investment (FDI) in Indian insurance companies was increased from 49 to 74 per cent under the automatic route subject to certain conditions. Such conditions stipulate, inter alia, that the following persons of the investee entity should be resident Indian citizens:

  1. the majority of the directors;
  2. majority of its 'key management persons' (as specified by the regulator from time to time); and
  3. at least one of among its chairperson of the board, managing director and chief executive officer of the company is a resident Indian citizen. The composition of the board of directors and 'key management persons' of the intermediaries or insurance intermediaries will be specified by the regulator, from time to time. Accordingly, the (Indian) Insurance Act 1938 was amended to increase the limit of foreign investment and remove references to 'Indian owned and controlled' in relation to Indian insurance companies receiving foreign investment.

iv FDI in petroleum and natural gas sector

The NDI Rules were amended to allow up to 100 per cent FDI under the automatic route in petroleum and natural gas sector if an 'in-principle' approval for strategic disinvestment of a public sector undertakings has been granted by the government.

v Reforms in the telecom sector

The Union Cabinet has approved a total of nine structural reforms and five procedural reforms together with relief measures were rolled out, some of the key reforms being:

  1. 100 per cent FDI permitted in the telecom sector (along with the corresponding amendment of the FDI Policy pursuant to Press Note No. 4 dated 6 October 2021 issued by the DPIIT and amendment of the NDI Rules);
  2. increase in the tenure of spectrum from 20 years to 30 years;
  3. exclusion of non-telecom revenue from the 'adjusted gross revenue';
  4. moratorium/deferment on due payments of spectrum purchased in past auctions (excluding the auction of 2021) for up to four years with 'net present value' protected at the interest rate stipulated in the respective auctions; and
  5. to convert, at the option of the government, the due amount pertaining to such deferred payment by way of equity at the end of the moratorium or deferment period, guidelines for which will be finalised by the Ministry of Finance.

vi Fast-track merger process

The Companies (Compromises, Arrangements and Amalgamations) Rules 2016 were amended to enable fast-track mergers for start-up companies. To clarify, a private company is a 'start-up company' if (1) up to a period of 10 years from its incorporation, the turnover of such company for any of the financial years has not exceeded 1 billion rupees; and (2) the company is working towards innovation, development or improvement of products or processes or services, or is a scalable business model with a high potential for employment generation or wealth creation. If a private company is formed by splitting up or reconstructing an existing business, it will not be considered a 'start-up'.

vii FDI from countries sharing a land border with India

In order to prevent opportunistic takeovers or acquisitions of Indian companies whose operations and finances may have suffered during the lockdown and because of the general impact of the covid-19 pandemic, the central government had amended the FDI Policy followed by amendment to the NDI Rules to make any FDI coming in from entities: (1) which are incorporated in a country that shares a land border with India; or (2) where the beneficial owner of an investment into India is situated in or is a citizen of any such country, subject to prior government approval.

viii Setting up of offshore AIFs

The RBI has decided that any sponsor contribution from a sponsor 'Indian party' to an AIF set up in an overseas jurisdiction, including in international financial services centres (IFSCs) in India, will be treated as overseas direct investment (ODI). Accordingly, an Indian Party, as defined in Regulation 2(k) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (FEMA 120), is allowed to set up an AIF in overseas jurisdictions (including IFSCs) under the automatic route, subject to compliance with FEMA 120 in connection with investment by an Indian Party in an entity outside India engaged in financial services activities. To clarify, FEMA 120 defines the term, 'Indian party' to mean:

  1. company incorporated in India;
  2. a body created under an Act of Parliament;
  3. a partnership firm registered under the Indian Partnership Act 1932 making investment in a joint venture; or
  4. a wholly owned subsidiary abroad, and includes any other entity in India as may be notified by the RBI.

If more than one such company, body or entity makes an investment in the foreign entity, all such companies or bodies or entities shall together constitute the 'Indian party' for the purposes of FEMA 120.

ix Overseas investment limit by AIFs

SEBI, in consultation with the RBI, has increased the overseas investment limit by AIFs to US$750 million (from US$500 million). In addition, for monitoring the utilisation of overseas investment limits, the AIFs need to disclose the following matters on the SEBI intermediary portal:

  1. in case the AIF has not utilised the overseas limit granted to them within a period of six months from the date of SEBI approval (i.e., the validity period), such non-utilisation is to be reported within two working days after expiry of the validity period;
  2. if the AIF has not utilised a part of the overseas limit within the validity period, it is to be reported within two working days after expiry of the validity period;
  3. if the AIF wishes to surrender the overseas limit at any time within the validity period, it needs to reported within two working days from the date of decision to surrender the limit; or
  4. the utilisation of overseas limit is to be reported within five working days of such utilisation.

VII Outlook

Private equity and venture capital investors are focusing not just on disruptive ideas but are also investing based on a wide array of characteristics such as creative business structures, better returns, infrastructures and robust promoters. India-focused dry powder is at US$8 billion and over 90 per cent of closed funds are either at target or oversubscribed. The next year is expected to be an active year for private equity with anticipated demand and record high dry powder that will help drive acquisitions.36

The global scenario is a key indicator with private equity and venture capital fundraising recoding at an all-time high of US$732 billion in 2021, which is 19 per cent higher than in 2020. During 2021, the PE/VC firms invested a record US$63 billion (across 1,202 deals) in Indian companies, touching a 57 per cent rise over the US$39.9 billion (across 913 deals) invested in 2020.37 India is the world's third-largest unicorn creator and a total of 44 unicorn companies were created in 2021.38 While mega-deals and unicorn sprint were active in the Indian PE/VC industry in 2021, successful IPOs of several investee companies followed by a string of liquidity events via secondary/strategic sales were key highlights for the investors. Such exemplary fundraises and liquidity events will establish a strong footing for Indian PE/VC industry on a global stage.

As we progress into the year 2022, India is likely to be one of the fastest growing major economies over the next decade, which makes it an extremely attractive market for the global private equity industry. Fundraising is expected to remain strong and continue apace in 2022.


1 Raghubir Menon and Shiladitya Banerjee are partners and Rooha Khurshid and Palak Dubey are associates at Shardul Amarchand Mangaldas & Co.

23 An AIF that invests in start-up or early-stage ventures, social ventures, small and medium-sized enterprises (SME), in infrastructure or other sectors or areas that the government or regulators consider socially or economically desirable (including VC funds, SME funds, social venture funds, infrastructure funds, angel funds and such other AIFs as may be specified).

24 An AIF that does not fall into Category I and III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted under the AIF Regulations will be a Category II AIF.

25 An AIF that employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives will be a Category III AIF. AIFs such as hedge funds or funds that trade with a view to making short-term returns or other open-ended funds can be included.

27 A sponsor is a person who sets up a REIT and is designated as such at the time of application made to SEBI. It also includes an inducted sponsor.

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