Startups and SMEs can now raise foreign funds through Alternative Investment Funds

To attract more overseas money into the country, the Union Cabinet cleared a proposal allowing foreign entities to invest in Alternative Investment Funds (AIFs). The decision will help make available more funds to startups, early stage ventures, small and medium enterprises (SMEs), which are generally considered as high risk investments. Official sources said the Cabinet has given its approval for foreign investments in AIFs that are set up under Sebi regulations and would widen the avenues for overseas entities to put in their money.

Finance Minister Arun Jaitley announced in this year's Budget that foreign investors would also be allowed to invest in the AIFs. They were set up in 2012 by the capital markets regulator Sebi as a new class of investment entity. AIFs are funds incorporated in India for the purpose of pooling in capital from Indian investors. The move would also reduce the pressure on the banking system to which the infrastructure sector looks for funding needs, they added.

According to official sources, uncertainty in investors mind would be removed with the introduction of a clear cut written policy, which would not only improve the investment environment but also induce development activities. Now, foreign investments would be allowed in AIFs that are established as registered trust, structured as incorporated company or limited liability partnership.

The same would be enabled in the FDI policy and FEMA regulations including foreign investment by way of units of AIFs set up as trust in terms of Sebi regulations, official sources said. AIFs - which include private equity, venture capital and hedge funds -- are regulated by Sebi, but the Foreign Exchange Management regulations are governed by the RBI

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