India clarifies safe harbor rules for offshore funds

The safe harbor rules set certain limitations on offshore investors that wish to locate their funds within India; among the requirements are that a fund has a minimum of 25 members. This restriction has been clarified to explain that institutional investors such as fund-of-funds that themselves have a large number of LPs will be counted as multiple investors, making it easier for GPs to meet the requirement.

In addition, the government's notification says that firms have up to 18 months from the time their funds are set up to satisfy the requirements for safe harbor, including the minimum number of investors and limitations on stake size for individual investors. They will continue to be treated as eligible until then, allowing them to face a lighter tax burden than funds that are considered resident in India. A board will also be established to certify firms' eligibility.

One notable exception to the easing of restrictions is firms that have more than 26% voting rights in any Indian company. This means that offshore buyout firms will not be able to take advantage of the safe harbor provisions, and that GPs will need to ensure that their stakes in any company do not rise above that level.

The relaxation of safe harbor rules was one of the measures recommended in January by the Alternative Investment Policy Advisory Committee (AIPAC), a panel convened by the Securities and Exchange Board of India to suggest reforms to encourage the development of India's entrepreneurial space. AIPAC's report also recommended letting the tax pass-through system apply to foreign funds and unlocking domestic pools of capital.

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• Topics
• South Asia
• Regulation
• GPs
• India
• SEBI
• tax