CAN OFFSHORE FUNDS BECOME ACCREDITED IN INDIA?

Much needed clarification is required on the application of the Accredited Investor (AI) framework to offshore funds that operate with committed capital from investors rather than direct asset ownership.

Offshore funds frequently participate in co-investments alongside Alternative Investment Funds (AIFs) and also invest in Angel Funds. In SEBI's board meeting on 18 June 2025, SEBI approved the proposal for Co-Investment Vehicle schemes and the regulatory review of Angel Fund framework. As per the approved proposals, only Accredited Investors will be allowed to invest in Co-Investment Vehicle schemes and in Angel Funds.

Given these developments, it is critical for offshore funds to obtain clarity on AI accreditation to ensure continued access to these investment opportunities in the Indian market.

REGULATORY FRAMEWORK

Under Annexure 8 of the SEBI Master Circular No. SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 07 May 2025 ("Master Circular") titled "Modalities of Accreditation".

1. Para 1.5: Net worth calculation for Body Corporates:

   Net worth = (Capital + free reserves) - (Accumulated losses + deferred expenditure not written off)

2. Para 1.6: Net worth calculation for Trusts:

   Net worth = (Book value of all assets, other than intangible assets) - (Book value of total liabilities)

3. Para 1.2: Foreign investor incorporated/established in form other than Individuals, Body Corporates or trusts shall be subject to eligibility criteria as applicable to Body Corporates.

4. Para 1.7: The eligibility of foreign investors to be accredited shall be determined on the basis of the rupee equivalent of their income and/ or net worth as applicable.

SPECIFIC ISSUE

Offshore Funds also operate similar to AIFs and have no assets or capital, instead they operate on commitment-based models where:

1. Investors commit capital but it is not immediately transferred to the fund

2. The committed capital is called as investment opportunities arise

3. The Fund entity itself may not hold significant assets on its balance sheet despite having substantial committed capital

CHANGES NEEDED

SEBI may consider making the following changes

1. Treatment of Committed Capital: Accreditation Agencies can consider committed but uncalled capital from investors as "Capital" in the net worth formula under the Master Circular.

2. Documentation: Clarification from SEBI on what documentation would be acceptable to evidence committed capital (e.g., Limited Partnership Agreements, subscription agreements). These documents are very confidential as they have the investment terms and Offshore Funds may not be comfortable sharing these documents.

Clarification from SEBI on this pressing issue will be critical as the industry awaits clarity on the Co-Investment Vehicle framework and the new regulatory framework for Angel Funds. Clarity from SEBI will provide certainty to market participants and facilitate participation of substantial offshore funds in Indian markets while maintaining the integrity of the AI framework.