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RBI proposes rules for Indian firms investing in overseas funds to back startups

30 September, 2016

The Reserve Bank of India on Friday proposed rules for Indian companies looking to invest in startups outside the country via overseas technology funds and suggested that only listed and profitable firms be allowed to make such investments.

The central bank said that it framed the draft rules as it had been receiving proposals from Indian companies to invest in overseas technology funds, which in turn will invest in overseas technology startups.

The RBI said that such proposals generally do not meet the eligibility norms for making direct investments overseas under the automatic route. It proposed that prospective investors seek prior approval from the central bank for such deals if they are not eligible for investing under the automatic route.

While the RBI didn’t specify any names, a number of Indian companies—especially tech firms—have invested in overseas startups in recent years. Infosys Ltd, the country’s second-largest software services exporter, and No. 3 Wipro Ltd both have made such investments as they bet on companies working on new technologies to offset slowing growth from their traditional outsourcing business.

Infosys in August invested in Israeli cloud monitoring solutions startup Cloudyn Software Ltd. Previously, Infosys picked up a minority stake in Israeli cloud software startup CloudEndure for $4 million and invested $3 million in WHOOP Inc, a US startup that offers performance optimisation solutions to athletes and sports teams. It has also backed US-based early-stage venture capital firm Vertex.

Wipro in August invested $1.5 million in Israeli cybersecurity startup Intsights Cyber Intelligence Ltd. Its venture capital arm in April invested an undisclosed amount in US cybersecurity company Vectra Networks Inc. for a minority stake. In March, Wipro Ventures picked up a minority stake in US-based IT security startup Emailage Corporation.

The central bank listed four main eligibility parameters for Indian companies investing in overseas tech fund. The company should have a minimum net worth of Rs 500 crore and shall be listed on the stock exchange; it should not be in the RBI’s caution list for long overdue export bills; Its total overseas investment should not exceed 400% of its net worth; and it should have earned a net profit in the previous three years, the central bank said.

The RBI also proposed conditions for one-time approval for companies planning to invest in overseas tech funds. It said that the cumulative investment in the overseas funds should not exceed 400% of the Indian company’s net worth or $500 million, whichever is less.

Also, companies will have to invest from their internal accruals and can’t borrow from the banking system for this purpose. The overseas fund must invest in overseas startups that are in alignment with the core business of the Indian company, the RBI said. It added that the companies must disclose such investments in their annual reports.

The RBI has sought feedback on the draft rules by 12 October.

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RBI proposes rules for Indian firms investing in overseas funds to back startups

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