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The Securities and Exchange Board of India (“SEBI”) issued a press release (PR No. 161/2016) of the quarterly board meeting held on November 23, 2016. The salient features of the decisions taken by SEBI regarding the AIF industry and investment in corporate debt by FPIs are as follows:

1) Amendment to SEBI (Alternative Investment Funds) Regulations, 2012 on Angel Funds

With an objective to develop the alternative investment industry and provide boost to startup ecosystem in India, SEBI has approved certain recommendations of Alternative Investment Policy Advisory Committee chaired by Mr. N.R. Narayana Murthy in relation to angel investors. The key amendments with respect to schemes of angel funds and investments by angel funds are as follows:

Particulars Old Position New Position
Upper Limit for investment by Angel Investors in a scheme Forty Nine (49) Two Hundred (200)
Investment by angel funds in venture capital undertaking (‘VCU’) VCU to be incorporated for three (3) years from date of investment VCU to be incorporated for five (5) years from date of investment
Minimum Investment Amount by Angel Fund in VCU Fifty (50) Lakhs Twenty Five (25) Lakhs
Lock-in period for Angle Fund in VCU Three (3) Years One (1) Year
Overseas Investment by Angel Funds - Permitted to invest in overseas VCU upto 25% of their investible corpus in line with other categories of AIFs.

2) Amendment to SEBI (Foreign Portfolio Investors) Regulations, 2014 permitting Foreign Portfolio Investors (FPIs) to invest in unlisted NCDs and securitised debt instruments

Extant SEBI (Foreign Portfolio Investor) Regulations, 2014 and Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2000 permitted investment in unlisted debt securities only in case of companies in the infrastructure sector. However, in order to enhance the investor base in unlisted debt securities and securitised debt instruments, SEBI has permitted FPIs to invest in the following:

a) Unlisted corporate debt securities in the form of non-convertible debentures/bonds > Eligible Borrowers: Public or private company subject to the guidelines issued by the Ministry of Corporate Affairs from time to time; >Residual Maturity: 3 years i.e. same in line with the G-sec securities; >End Use: End use restriction on the proceeds from unlisted debt securities has been imposed upon investment in real estate business, capital market and purchase of land. The expression ‘Real Estate Business’ shall have the same meaning as assigned to it in Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 Notification No.FEMA.362/2016-RB dated February 15, 2016.

B) Securitised debt instruments, including (i) any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of asset/s with banks, FIs or NBFCs as originators; and/or (ii) any certificate or instrument issued and listed in terms of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 with a minimum 3-year residual maturity period.

FPI investments in the unlisted corporate debt securities and securitised debt instruments shall not exceed INR 35,000 crores which is within the extant investment limits (i.e. INR 2,44,323 crores) prescribed for corporate bond by RBI from time to time.

The aforementioned would come in force upon SEBI amendment to SEBI (Foreign Portfolio Investors) Regulations, 2014.

ARA LAW is a Mumbai based law firm, having a branch office in Bengaluru and distinctively focused on serving funds, institutional investors and corporates etc. We take pride in resolving our clients’ most complex legal challenges in a meaningful way.

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