India overhauls Overseas Investment Regulations for ease of doing business

The Government of India in consultation with the Reserve Bank Of India (RBI) on 22 August 2022 notified the Foreign Exchange Management (Overseas Investment) Rules, 2022 (Overseas Investment Rules) and Foreign Exchange Management (Overseas Investment) Regulations, 2022 (Overseas Investment Regulations) in supersession of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015. The new regime aims to cover wider economic activity and significantly reduce the need for seeking specific approvals reducing the compliance burden and associated costs.

The Overseas Investment Rules and Overseas Investment Regulations provide for the following:

  • broader and clearer definitions of various terms such as ‘foreign entity’, ‘strategic sector’, ‘control’, ‘Indian entity’, ‘overseas direct investment’, ‘financial commitment’, ‘overseas portfolio investment’ and so on;
  • Overseas Direct Investment (ODI) means acquisition of any unlisted equity capital or subscription as a part of the memorandum of association of a foreign entity; or investment in 10% or more of the paid-up equity capital of a listed foreign entity; or investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity and Overseas Portfolio Investment means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an International Financial Services Centre (IFSC);
  • overseas investment shall be made in a foreign entity engaged in a bona fide business activity, directly or through step down subsidiary or the special-purpose vehicle, subject to the limits and the conditions laid down in Overseas Investment Rules and Overseas Investment Regulations, whereas bona fide business activity means any business activity permissible in India and the host country;
  • the Central Government on an application made to it, through the RBI, may allow financial commitment above the limits specified in the Overseas Investment Rules and Overseas Investment Regulations in certain strategic sectors (which include energy and natural resources sector such as oil, gas, coal, mineral ores, submarine cable system and start-ups and any other sector or sub-sector as deemed necessary by the Central Government);
  • the issue/transfer of equity capital of a foreign entity from a person resident outside India or a person resident in India to a person resident in India or from a person resident in India to a person resident outside India shall be subject to a price arrived on an arm’s length basis;
  • person resident in India can acquire equity capital through exercise of rights or by way of bonus shares in addition to the equity capital he already holds in a foreign entity in accordance with the Overseas Investment Rules/Regulations;
  • Overseas Investment in start-ups are to be made by an Indian entity only from the internal accruals whether from the Indian entity or group or associate companies in India and in case of resident individuals, from own funds of such an individual;
  • round tripping structure of investment where a person resident in India makes a financial commitment in a foreign entity that has invested or subsequently invests in India appears to have been permitted under the new regime limiting the layers of subsidiaries to 2 (two) exempting a certain class of companies stated in Companies (Restriction on Number of Layers) Rules, 2017;
  • Indian entity not engaged in financial services activity in India may make ODI in a foreign entity, which is directly/indirectly engaged in financial services activity, except banking or insurance, subject to the condition that such Indian entity has posted net profits during the preceding 3 (three) financial years;
  • person resident in India may make overseas investment in an IFSC in India in the manner and subject to the terms and conditions as specified;
  • total financial commitment made by an Indian entity in all the foreign entities taken together at the time of undertaking shall not exceed 400 (four hundred) percent of its net worth;
  • compliance with Foreign Contribution (Regulation) Act, 2010 for a resident acquiring foreign securities by way of gift from a foreign resident is mandatory under the Overseas Investment Rules which was not required under the previous regime;
  • acquisition/transfer of equity capital reckoned as ODI may be deferred for such definite period from the date of the agreement as provided in such agreement and such deferred part of consideration shall be treated as non-fund based commitment; and
  • late submission fee for reporting delays under the Overseas Investment Regulations will be made through the designated Authorised Dealer Bank in cases where a person resident in India has made a delay in filing/submitting the requisite form/return/document.

The Overseas Investment Rules and Overseas Investment Regulations, may be accessed through the following link: