Rules trip in forex Indian angels seeking to invest in international startups
- ByStartupStory | December 7, 2022
Indian angel investors who invest in foreign startups face compliance difficulties under the new international exchange regulations because authorised banks insist that such investments should only be made through the overseas direct investment (ODI) window.
Up until now, the Liberalized Remittance Scheme, which has few compliance requirements, has been used by Indians to make investments abroad. According to the government’s overseas change regulations, investing in foreign companies is only permitted through the ODI route or the just-launched overseas portfolio funding (OPI) program. The OPI route only allows investments in foreign listed companies, despite having simplified rules. Angel investors cannot employ this method because the majority of startups are unlisted.
The OPI method should also cover unlisted securities, according to the industry. “When investments are made by corporate investors, the ODI route makes sense because the compliance costs are covered by the size of the investments. When securities are listed, the OPI route makes sense, according to Vivek Iyer, associate, Grant Thornton Bharat. Additionally, he suggested that “considering some amount of liberalisation under the ODI route, keeping in mind the angel investors, would be worthwhile for the government.”
If they choose the ODI method, investors must submit a number of documents to the Reserve Bank of India. These include the statutory audit reports as well as the valuation report from the foreign company through whom the finance is to be made. Market participants claim that the target companies are typically reticent to share all of this information with the angel investors, who typically buy just small stakes in companies, typically less than 10%.
“The OPI regulations, in their current form, deny Indian investors the opportunity to invest in promising new-age startups based outside of India, and in a sense closes the doors for individual Indian investments in future unicorns,” said Amit Agarwal, partner at Nangia Anderson. “Therefore, a rationalisation of the current OPI restrictions to let a specific class of mature individual investors to participate in unlisted securities outside of India would be a welcome step.”
High-level angel investors frequently invest in startups in other countries. Additionally, some Indian startups have a foreign holding structure, with the parent company included abroad while an Indian subsidiary handles day-to-day operations. Angel investors would be required by the guidelines to make an ODI investment even when investing money in such firms.
According to Moin Ladha, an associate at Khaitan & Co., “There was a hope that the new regime would define the boundaries of portfolio investment in a way that it would apply for unlisted enterprises as well.” We believe that the FAQs that are anticipated for the new ODI regime will make this clear.
A senior executive at a top private equity fund told ET that the problem was being experienced by all types of angel investments, including syndicate investments, where several angel investors pool money and invest in a startup. According to the CEO, “In such ventures, the syndicate builds roll-up vehicles (RUV), and dealer banks have been adopting a position that even money into an RUV would have to travel through ODI method.” He continued, “We have already voiced our concerns to the regulators over the challenges presented by the new foreign exchange laws.
Follow Startup Story
Related Posts
