Reserve Bank of India(RBI), the regulatory body that controls the monetary policies of the country, on Friday introduced a new draft framework to facilitate investments in overseas technology funds which further deploy these funds to foreign startups.
You might now be thinking that there already is an overseas direct investment policy in place, then why is RBI making amends to introduce this change? Well, in terms of aforementioned investments, RBI is of the opinion that they do not meet the eligibility norms for making overseas direct investments under the automatic route.
So, to completely understand the changes introduced in the draft, let’s first take a brief look at the direct investment policy into startups outside India. As stated on the regulator’s official website,
Direct investments outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity.
And now we need to know what Automatic Route is to get to the root cause of this new draft framework. Automatic Route is the one where an Indian Party does not require any prior approval from RBI to invest in startups abroad.
So, the draft framework means that Indian parties would need to meet a set of conditions and seek approval from RBI before making investments into overseas tech funds — not startups.
The parties need to adhere to the following conditions, if they wish to invest in an overseas fund. These include a minimum net-worth of Rs500 crore, exclusion from the ‘caution list’ it prepares, total overseas investment under 400% of net-worth, and earning net profit for the last three years. The tech fund’s investment in overseas startups should be reported and aligned to the core business activity of the company.
Apart from this, if you’re looking for a one-time approval, then the aggregate or cumulative investment in the overseas technology funds should not exceed 400 percent of your company’s net-worth or $500 million, whichever is less. The RBI also lays stress on the fact that invetsments in the overseas technology fund should be from the internal accruals/group or associate companies and not borrowed from the banking system in India.