Investment by Indian Party into overseas AIF or AIF in IFSCs in India

In view of FAQ No. 64 on ODI  and certain RBI compounding orders, overseas JV/ WOS of an Indian party will not be considered as engaged in the bonafide business activity if they have in turn made a direct investment into India. It will be viewed as a Round Tripping of Investment which requires prior RBI approval.

Indian party is defined as  “a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad,…”

RBI vide A. P. (DIR Series) Circular No. 04 dated 12th May 2021 has stated that Investment by Indian Party as a sponsor into AIF set-up in an overseas jurisdiction and IFSCs in India will be considered as an outbound investment under the automatic route provided Indian Party complies with the conditions investing in an entity engaged in the financial service sector o/s India.

This is a welcome move by the regulator as Indian Party is no longer required to take prior RBI approval. This move should boost the IFSC regime.



Reserve Bank of India 

A.P.(DIR Series) Circular No. 04

May 12, 2021


All Category-I Authorised Dealer Banks

Madam/ Sir

Sponsor Contribution to an AIF set up in Overseas Jurisdiction, including IFSCs

Attention of AD Category – I banks is invited to paragraph A.3.(e) and B.6 of Master Direction No.15 dated January 1, 2016, on “Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad”, as amended from time to time and Regulation 7 of the Notification FEMA 120/2004-RB, pertaining to provisions for an Indian Party (IP) making investment/ financial commitment in an entity engaged in the financial services sector.

2. It has been decided that any sponsor contribution from a sponsor IP to an Alternative Investment Fund (AIF) set up in an overseas jurisdiction, including International Financial Services Centres (IFSCs) in India, as per the laws of the host jurisdiction, will be treated as Overseas Direct Investment (ODI). Accordingly, IP, as defined in regulation 2(k) of the Notification ibid. can set up AIF in overseas jurisdictions, including IFSCs, under the automatic route provided it complies with Regulation 7 of the Notification FEMA 120/2004-RB.

3. All the other provisions under the Notification ibid. shall remain unchanged. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

4. The Master Direction No. 15 dated January 01, 2016, is being updated to reflect the changes.

5. The directions contained in this circular have been issued under section 10 (4) and 11(1) of the FEMA and are without prejudice to permissions/approvals, if any, required under any other law.

Yours faithfully

Ajay Kumar Misra
Chief General Manager-in-Charge


The Author is working with M/s P. R. Bhuta & Co. CAs in the field of FEMA, International Taxation & Transfer Pricing. In case of any feedback, the author can be reached at [email protected]

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Qualification: CA in Job / Business
Company: M/s P. R. Bhuta & Co. Chartered Accountants
Location: Mumbai, Maharashtra, India
Member Since: 04 May 2021 | Total Posts: 2
Naisar Shah is an Associate Member of the ICAI. He has also completed B.Com, LL.B., and Diploma in International Taxation (ICAI). He has 3 years of post-qualification experience and he specializes in the International Tax/ FEMA/ Transfer Pricing domain. He is currently working with M/s P. R. Bhut View Full Profile

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