The Reserve Bank of India (RBI) has taken a step towards enhancing transparency and compliance in the alternative investment fund (AIF) sector. Through Circular (No. 7) issued on May 21, 2024, the RBI has addressed the issuance of partly paid units by AIFs to non-resident individuals, a move aimed at streamlining foreign investment regulations.

A partly paid unit is a security where investors pay only a portion upfront, with the rest due later. For the RBI circular, it refers to units issued by alternative investment funds (AIFs) to foreign investors. This arrangement offers flexibility, allowing investors to commit capital gradually while gaining exposure to AIF opportunities. It benefits both investors and fund managers, managing cash flows effectively and attracting those unable to pay in full immediately. 

The circular is directed to all Authorized Dealer Category-I (banks) and focuses specifically on the regularization of AIF issuances to non-resident individuals. This regularisation pertains to issuances made prior to the recent amendment in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

This amendment, introduced through the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2024, enabled the issuance of partly paid units to foreign investors by investment vehicles.

By allowing the regularisation of these pre-amendment issuances through compounding under the Foreign Exchange Management Act, of 1999, the RBI aims to provide clarity and ease compliance for AIFs and foreign investors operating in India. However, before seeking compounding from the Reserve Bank, AD Category-I banks are required to ensure certain administrative actions are completed.

These actions include reporting such issuances by AIFs to the Reserve Bank through the Foreign Investment Reporting and Management System (FIRMS) Portal. Additionally, AD Category-I banks are instructed to issue conditional acknowledgements for such reporting.

This move underscores the RBI's commitment to fostering a conducive environment for foreign investment in India while ensuring adherence to regulatory frameworks. By regularising the issuance of partly paid units and streamlining reporting procedures, the RBI aims to facilitate smoother capital flows into the country.

This initiative is expected to provide clarity to both AIFs and foreign investors, further bolstering India's position as an attractive destination for investment in the global market.

You can access the circular here.

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