In a bid to promote ease of doing business, the finance ministry on Monday notified the consolidated rules for overseas investment by Indian entities. 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.
The consolidated rules bring in a host of changes that could impact merger and acquisition decisions of Indian residents, including corporates and startups. “In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is need of Indian corporates to be part of 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,” the finance ministry said in a statement.
Clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment related transactions that were earlier under approval route are now under automatic route, significantly enhancing ‘ease of doing business’ it said. Last year, the government of India in consultation with the Reserve Bank undertook a comprehensive exercise to simplify these regulations.
The draft Foreign Exchange Management (Overseas Investment) Rules and draft Foreign Exchange Management (Overseas Investment) Regulations were also put in the public domain for consultations, it said. As per the notified rules, any ODI in startups recognised under the laws of host country could 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 the case of resident individuals, from own funds of such an individual, Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP, said.
Barring banking and insurance companies, NBFCs and government companies, a person resident in India cannot make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries, he said. “The embargo on acquiring gift of foreign securities, only from relatives, has now been substituted as permissible from any non-resident outside India, subject to compliance under Foreign Contribution (Regulation) Act, 2010,” he said.
The new rules have included overseas investment in International Financial Services Centre (IFSC) by person resident in India. A person resident in India may make overseas investment in an IFSC in India within the limits, a gazette notification issued by the finance ministry said.
A person resident in India can make contribution to an investment fund or vehicle set up in an IFSC as Overseas Portfolio Investment (OPI), it said. It further said that 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 such entity does not have a subsidiary or step down subsidiary outside IFSC where the resident individual has control in the foreign entity.
The notification said that an authorised dealer bank including its overseas branch may acquire or transfer foreign securities in accordance with the terms of the host country or host jurisdiction, as the case may be, in the normal course of its banking business. Any resident individual can make ODI by way of investment in equity capital or OPI subject to the overall ceiling under the Liberalised Remittance Scheme of the Reserve Bank.
Currently, the LRS permits USD 2,50,000 outward investment by an individual in a year. With regard to corporate, the notification said, an Indian entity can make OPI not exceeding 50 per cent of its net worth as on the date of its last audited balance sheet.
Corporates can make ODI by way of investment in equity capital for the purpose of undertaking bonafide business activity, it said, adding, the total financial commitment made by an Indian entity in all the foreign entities taken together at the time of undertaking such commitment would not exceed 400 per cent of its net worth as on the date of the last audited balance sheet or as directed by the Reserve Bank.
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