Foreign Exchange Management (Overseas) Investment Rules, 2022, and Foreign Exchange Management (Overseas) Investment Regulations, 2022 notified. These replace the erstwhile Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004, and Foreign Exchange Management (Acquisition and Transfer of any Immovable Property outside India) Regulations, 2015. In this article, we briefly discuss the Overseas Investment Rules 2022 under FEMA.
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Introduction
The Ministry of Finance announced the consolidated guidelines for Indian entities’ overseas investment on Monday to facilitate “Ease of doing business” – the Foreign Exchange Management (Overseas Investment) Rules, 2022. In view of the evolving needs of Indian businesses, in an increasingly integrated global market, there is a need for Indian Corporations to be part of the global value chain. The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics. Clarity has been provided on Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI) and various overseas investment-related transactions that were earlier under the approval route are now under the automatic route, significantly enhancing ‘ease of doing business.
Overseas Investment Rules, 2022 under FEMA notified
In the month of August 22, The Reserve Bank of India (RBI) revised the Overseas Direct Investment (ODI) rules, providing much-needed clarity on overseas investment. The new rules outline points that will help Indian start-ups expand overseas, build businesses in partnerships with foreign start-ups and allow investors to expand their portfolios, even if there are any overlaps. The rules will impact family offices, Indian conglomerates, and tech start-ups opting for ODI in listed and unlisted companies abroad. The Foreign Exchange Management (Overseas Investment) Rules, 2022 will subsume extant regulations pertaining to Overseas Investments and Acquisition and Transfer of Immovable Property Outside India Regulations, 2015.
Amendments that were made:
The Foreign Exchange Management (Overseas Investment) Rules 2022 shall be administered by the Reserve Bank of India (RBI), which will issue requisite directions, circulars, instructions, and clarifications, from time to time, as may be necessary for the effective implementation of the provisions of these rules.
The following are the Amendments:
- Prior to RBI’s approval was needed by any entity for investment abroad. Now, a no-objection certificate (NOC) is needed from a relevant agency for investment abroad. If there is any delay, it is deemed to have been given. The rules have included overseas investment in International Financial Services Centre (IFSC) by a person resident in India.
- A person resident in India may make overseas investments in an IFSC in India within the limits. A resident individual may make Overseas Direct Investment (ODI) in a foreign entity, including an entity engaged in financial services activity, (except in banking and insurance), in IFSC, if the such entity does not have a subsidiary or step-down subsidiary outside IFSC where the resident individual has control in the foreign entity.
- Round Tripping: Round Tripping is a structure where investment is undertaken in a foreign entity that ultimately invests or has investment back in the host country. RBI through the FAQ on ODI clarified that structure requires prior approval of the RBI. The rules prescribe that the following structure is allowed up to 2 layers of subsidiaries. This a welcome move by the Government to enable the start-ups and companies in India to attract investments from VCs/PE funds.
- The rules remove the ambiguity on the Foreign Portfolio Investment (FPI) which was earlier not defined under the regulation. Investments less than ten percent in the paid-up equity capital of a listed foreign entity or investments in the paid-up equity capital of a listed foreign entity not involving control will be classified under FPI.
- “disinvestment” means partial or full extinguishment of the right, title, or possession of equity capital acquired under these rules.
- The rules have removed the condition of the approval of RBI in the case of restructuring of the Balance Sheet of the overseas entity involving write-off of the capital of more than 25% of the investment.
Conclusion
The Government of India in consultation with the Reserve Bank of India undertook a comprehensive exercise to simplify these regulations. The new rules notified are aligned with the current business and economic dynamics and will be a step towards making India a global impact creator. In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is a need for Indian corporates to be part of the global value chain. The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics. Clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment-related transactions that were earlier under the approval route are now under the automatic route, significantly enhancing the Ease of Doing Business.
