Several rich Indians have reportedly re-started investing in a risky asset called ‘SAFE’ with a hope of making multi-bagger returns from foreign startups. They are doing this even at the risk of landing on the wrong side of regulatory boundaries.
SAFEs or ‘Simple Agreement for Future Equity’ are basically hybrid notes sold by foreign firms to raise money for startups. It is like a promise to an investor that s/he will hold stocks or preference shares a few years later if the startup reaches certain milestones. Being ‘rights’ for the future, SAFEs do not qualify as overseas direct investment (ODI) or overseas portfolio investment (OPI) allowed by the RBI.
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Two years back, the RBI had virtually killed this SAFE market with its dos and don’ts on overseas investments . However, it is again making a comeback, according to The Economic Times.
The RBI’s Liberalised Remittance Scheme (LRS) currently allows Indians to invest up to $250,000/year abroad in securities and properties. It is mandatory for Indians to bring back idle funds in their LRS accounts to India. However, the report says some Indians have deployed their unutilised funds in LRS accounts into SAFEs by giving a misdeclaration that they are making overseas portfolio investment.
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Making such investment in SAFEs is extremely risky, not just from regulatory point of view but from returns point of view also.
SAFEs offer uncertain returns and without any legal remedies in case of default of the startup. Hence, they are not permitted under RBI’s overseas investment rules. Indians are allowed to invest only in regulated entities under OPI.
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