Introduction
On 21.05.2024, the Reserve Bank of India (‘RBI’) issued a circular[i] addressing the concerns of the issuance of partly paid-up units by Alternative Investment Funds (‘AIFs’) to persons resident outside India prior to 14.03.2024.
The circular has been released in pursuance of the amendment brought on 14.03.2024 in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘FEM NDI Rules’) via the FEM NDI (Second Amendment) Rules, 2024. This amendment permitted the issuance of partly paid-up units by investment vehicles, including AIFs, in accordance with the Securities and Exchange Board of India (‘SEBI’) regulations.
The circular mandates that these issuances must be regularised through the compounding process under the Foreign Exchange Management Act, 1999 (‘FEMA’).
A Brief Background
Partly paid shares, in simple terms, means allowing the investors to acquire the company shares without making the full payment upfront, i.e. by making only partial payment and paying the remaining amount in instalments as per the company policies. This option is commonly used in the AIFs, a unique category of privately pooled investment vehicles that differ from conventional instruments. Institutions and high-net-worth individuals typically fund AIFs due to the substantial investments involved.
Investors in AIFs are allocated units based on their contributions or beneficial interest in the portfolio. When an investment opportunity arises, investment managers draw down capital from investors based on their commitments. The issuance of partly paid units facilitates this process.
Tracing the Development of Regulations
The SEBI (AIF) Regulations, 2012, did not explicitly bar AIFs from issuing partly or fully paid units. Later, the SEBI (AIF) (Fourth Amendment) Regulations, 2018, clarified that AIFs could issue partly paid-up units by revising the definition of ‘units.’ According to notification and the FEM (Mode of Payment and Reporting of NDI) Regulations, 2019, investment vehicles, including AIFs, had to file ‘Form InVi’ within 30 days of issuing units to non-residents without barring partly paid-up units. Thus, this indicated no restriction on the issuance of partly paid-up units by AIFs.
However, by mid-2023, Authorized Dealer (‘AD’) banks stopped accepting ‘Form InVi’ for partly paid-up units issued by AIFs to non-residents, leading to modifications in the said form that restricted such issuances. The AIF industry further requested clarification from the RBI, resulting in the 14.03.2024 amendment, which explicitly allowed the issuance of partly paid-up units by investment vehicles, including AIFs, in line with the SEBI regulations.
However, confusion arose regarding the units issued before this amendment, leading the RBI to release the circular, directing to regularize these past issuances through compounding.
The Present Circular
The circular mandates that issuances of shares before 14.03 2024 must be regularized through the compounding process under FEMA as outlined in the Foreign Exchange (Compounding Proceedings) Rules, 2000. Compounding essentially means that in cases of contraventions of foreign exchange regulations, any pending proceedings can be withdrawn by paying fees and, in many cases, a monetary penalty to the RBI. The directions in the circular issued under ss. 10(4) and 11(1) of FEMA are independent of any other required permissions or approvals under different laws.
However, before approaching the RBI for compounding, AD Category-I banks must ensure that all necessary administrative actions are completed. This includes reporting these issuances to the RBI via the Foreign Investment Reporting and Management System (‘FIRMS’) portal and issuing conditional acknowledgements for such reporting.
Additionally, the circular has also highlighted that the AD Category-I banks should inform their customers and relevant parties about the contents of this circular.
Our Analysis
The RBI’s notification to regularize the issuance of partly paid units by AIFs has posed several challenges. For instance, Foreign Portfolio Investors (‘FPIs’) are concerned about potential penalties for past actions, and the lack of clarity on compounding fees creates financial planning uncertainties for AIFs. It is also feared that the substantial fees, particularly if calculated as a percentage of the capital drawn down, could significantly impact the financial stability and operations of AIFs. Additionally, the required administrative actions impose a burden on the AD Category-I banks and AIFs, while the process and potential penalties generate investment insecurity. Despite providing a legal pathway for regularizing past issuances, the notification leaves unresolved concerns about financial distress, administrative complexity, and investment security.
End Note
[i] A.P. (DIR SERIES) CIRCULAR NO. 7, DATED 21-5-2024.
Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
AUTHORED BY
More Insights
24-07-2026
10
min read
‘Shylockian’ Lending is ‘Squeezing of Blood’: NCLT Moves Beyond Debt & Default to Reject a Section 7 Application
In a rare departure from the conventional debt-and-default enquiry under section 7 of the IBC, the NCLT, Kochi Bench rejected the financial creditors' petition after characterizing the underlying arrangement as a ‘Shylockian system’ of lending. This court ruling discusses Shylockian lending and examines the strength of the Tribunal's focus on the economic substance of the transaction against established legal principles governing admission under section 7 of the IBC.
10-07-2026
7
min read
Faceless Reassessment after S. 147A: What the Supreme Court Did – and Did Not – Decide
The Supreme Court's decision in Tej Pratap Singh does not settle the JAO–FAO controversy. Following Parliament's retrospective insertion of s. 147A, it remands the issue to the High Courts for fresh consideration. Faceless reassessment was never merely about moving tax files from paper to portal; it fundamentally changed the statutory authority responsible for communicating with the taxpayer, examining the record, drafting the order and completing the assessment. The real question now is how far a retrospective legislative clarification can go.
22-06-2026
8
min read
Claim Admission is not Debt Acknowledgement: Supreme Court on RP’s Role & Limitation under the IBC
Can admission of a claim by a Resolution Professional extend limitation under section 18 of the Limitation Act? In Shankar Khandelwal v. Omkara Asset Reconstruction Pvt. Ltd., the Supreme Court answered this question in the negative, holding that claim admission during CIRP is merely a statutory claim-verification process and not an acknowledgement of debt. The ruling clarifies the RP’s non-adjudicatory role and reinforces important principles governing limitation under the IBC.