hnis: Proposal on investment in foreign companies, VCs irks HNIs

Rich Indians will discover it nearly not possible to guess on overseas startups, corporations, abroad enterprise capital funds and related offshore unlisted entities as soon as a brand new rule proposed by the Reserve Financial institution of India (RBI) comes into power.

Since greater than a decade, native excessive web price people (HNIs) and ultra-HNIs have been shopping for properties, securities — listed in addition to unlisted — and models of world funds by transferring funds underneath the central financial institution’s liberalised remittance scheme (LRS) which permits an individual to speculate a most of $250,000 a yr.

Whereas the compliance and paperwork for investments in unlisted entities had been tightened a couple of years in the past, requiring particular person traders to fulfil formalities underneath ‘abroad direct funding’ (ODI) — the doorways had been by no means actually shut.

‘Regressive Modifications’

Nevertheless, the proposed laws on buy of overseas unlisted securities lay down sure circumstances that successfully rule out such investments. A few of the abroad funds and a number of advisors on cross-border investments on behalf of their HNI purchasers have requested the central financial institution to carry again the proposed modifications, three individuals advised ET.

In response to the draft laws, any funding in an unlisted firm, even for a stake as little as 1-2%, is allowed (as ODI) provided that the Indian investor has management over the overseas outfit — a proper that only a few, if any, traders may have.

Moreover, the investee firm can’t in flip put cash in a subsidiary or float a step-down subsidiary, one thing a minority investor can by no means guarantee. The investee firm which points the unlisted securities can’t be in monetary companies — thereby, limiting investments with a overseas non-public fairness or VC fund.

“Beneath the present LRS guidelines, resident traders are permitted to spend money on world funds arrange overseas throughout the permissible limits. These modifications if carried out wouldn’t solely lead to lack of ability of people to take part in world offers on a portfolio foundation, however might additionally lead to resident Indians being thought to be defaulting traders when it comes to the fund paperwork since they could not have the ability to fulfil their current commitments,” stated Parul Jain of the legislation agency Nishith Desai Associates.

Annual remittance restrict

“There was an extended ask to extend annual remittance restrict from $250,000 to $1 million. Somewhat than proposing a rise in remittance limits, with draft guidelines, resident angel funding into startups and different unlisted corporations arrange overseas would not be permitted. Such a proposed change appears regressive in nature in comparison with the present RBI coverage, and may have an antagonistic affect on the flexibility of Indian traders to turn out to be world traders,” she stated.

An RBI spokesperson didn’t reply to ET’s question on the regulatory rationale behind the proposal — whether or not there have been issues associated to cash laundering or round-tripping.

“Proscribing a resident to spend money on unlisted corporations with out management will deprive the chance to spend money on many offshore growth-oriented corporations. Though in sure instances, investments could have been made with mala fide intention, closing the door for all shouldn’t be justified,” stated senior chartered accountant Dilip Lakhani.