Key highlights of the Overseas Investments Directions, Rules, Regulations and Reporting Requirements issued by RBI
Reserve Bank of India (RBI) has issued Circular No. 12 dated 22nd August, 2022 to introduce the Foreign Exchange Management (Overseas Investment) Directions, 2022 to be read with Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022, which is superseding the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.
Key points of the Directions are:
1. The earlier concept of Joint Venture (JV) and Wholly Owned Subsidiary (WOS) is substituted under the new directions with the concept of foreign entity, which means an entity formed or registered or incorporated outside India, including in International Financial Services Centre (IFSC) in India, that has limited liability.
2. The earlier concept of Indian party (IP) where all the investors from India in a foreign entity were together considered as IP, has been substituted under the new directions with the concept of Indian entity where each investor entity shall be separately considered as an Indian entity.
3. “Overseas Direct Investment (ODI)” means (i) acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity, or (ii) investment in 10% or more of the paid-up equity capital of a listed foreign entity, or (iii) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity. It has also been clarified that once an investment in a foreign entity is classified as ODI, the investment shall continue to be treated as ODI even if such investment falls below 10% of the paid-up equity capital or the investor loses control in the foreign entity.
4. “Overseas Portfolio Investment” or “OPI” 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 IFSC. Provided that OPI by a person resident in India in the equity capital of a listed entity, even after its delisting shall continue to be treated as OPI until any further investment is made in the entity.
Non-applicability of rules and regulations in certain cases
The provisions contained in the said Directions/Rules/Regulations shall not apply to-
a. any investment made outside India by a financial institution in an IFSC;
b. acquisition or transfer of any investment outside India made,–
i. out of Resident Foreign Currency Account(RFCA); or
ii. out of foreign currency resources held outside India by a person who is employed in India for a specific duration or for a specific job or assignment, duration of which does not exceed three years; or
iii. in accordance with section 6(4) of the Foreign Exchange Management Act which says that a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India.
Continuity of certain Investments
It has been notified that any investment or financial commitment outside India made in accordance with the Act or Rules or Regulations and held as on the date of publication of these directions/rules, shall be deemed to have been made under these rules and the Foreign Exchange Management (Overseas Investment) Regulations, 2022.
Rights issue and bonus shares
It has also been notified that any person resident in India who has acquired and continues to hold equity capital of any foreign entity may invest in the equity capital issued by such entity as a rights issue or may be granted bonus shares subject to the terms and conditions laid under these rules.
Overseas Investments
a. Overseas investment by a person resident in India 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 under automatic route, subject to the limits and the conditions laid down in these rules and regulations. The person intending to make any financial commitment shall fill up the Form FC duly supported by the requisite documents and approach the designated AD bank for making the investment/remittance.
b. The applications for overseas investment/financial commitment in Pakistan/other jurisdiction as may be advised by the Central Government from time to time or in strategic sectors/specific geographies shall require prior approval of the Central Government.
c. Reserve Bank may under approval route, on an application made to it through the designated AD bank and for sufficient reasons, permit a person resident in India to make or transfer any investment or financial commitment outside India subject to such conditions as may be laid down by it. It has been specified that, financial commitment by an Indian entity, exceeding USD 1 billion (or its equivalent) in a financial year shall require prior approval of the Reserve Bank even when the total financial commitment of the Indian entity is within the eligible limit under the automatic route.
NOC from the lender bank/regulatory body/investigative agency
Any person resident in India having an account appearing as a Non-Performing Asset (NPA) or is classified as wilful defaulter or is under investigation by a financial sector regulator/ investigative agency shall obtain an NOC from the concerned lender bank/regulatory body/investigative agency, before making financial commitment or undertaking disinvestment.
Manner of making ODI by Indian Entity
a) An Indian entity may make ODI by way of investment in equity capital by way of– subscription as part of memorandum of association or purchase of equity capital, listed or unlisted; acquisition through bidding or tender procedure; acquisition of equity capital by way of rights issue or allotment of bonus shares; capitalisation; the swap of securities; merger, demerger, amalgamation or any scheme of arrangement.
b) An Indian entity not engaged in financial services activity in India may make ODI in a foreign entity, which is directly or 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 three financial years.
c) The total financial commitment made by an Indian entity in all the foreign entities taken together at the time of undertaking such commitment shall not exceed 400 percent of its net worth.
Manner of making OPI by Indian Entity
a) An Indian entity making OPI shall not exceed 50% of its net worth as on the date of its last audited balance sheet.
b) A listed Indian company may make OPI including by way of reinvestment.
c) An unlisted Indian entity may make OPI only by way of acquisition through bidding or tender procedure; acquisition of equity capital by way of rights issue or allotment of bonus shares; capitalisation; the swap of securities; merger, demerger, amalgamation or any scheme of arrangement.
Pricing Guidelines
The pricing of the issue or 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 who is eligible to make such investment or from a person resident in India to a person resident outside India shall be on an arm’s length basis.
Restrictions and prohibitions
a) No person resident in India shall make ODI in a foreign entity engaged in – real estate activity; gambling in any form; and dealing with financial products linked to the Indian rupee without specific approval of the Reserve Bank.
b) Any ODI in start-ups recognised under the laws of the host country or host jurisdiction as the case may be, shall 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 it shall not be made out of funds borrowed from others.
c) No person resident in India shall 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. Further, there is no such restriction with respect to banking companies, NBFCs and Insurance companies.
Modes of Payments
A person resident in India making Overseas Investment may make payment – by remittance made through banking channels; from funds held in an account maintained in accordance with the provisions of the Act; by swap of securities; by using the proceeds of American Depository Receipts or Global Depositary Receipts or stock swap of such receipts or external commercial borrowings for making ODI or financial commitment by way of debt by an Indian entity.
Obligation and Reporting Requirement
a. A person resident in India acquiring equity capital in a foreign entity, which is reckoned as ODI, shall submit the evidence of investment to the AD bank within six months, failing which the funds remitted overseas shall be repatriated within the said period of six months.
b. A person resident in India, through its designated AD bank, shall obtain a Unique Identification Number or “UIN” from the Reserve Bank for the foreign entity in which the ODI is intended to be made before sending outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier. Form FC shall be submitted along with requisite documents to AD bank for obtaining UIN.
c. A person resident in India acquiring equity capital in a foreign entity which is reckoned as ODI, shall submit an Annual Performance Report (APR) with respect to each foreign entity every year by 31st December along with relevant documents.
d. An Indian entity which has made ODI shall submit an Annual Return on Foreign Liabilities and Assets (FLA) within 15th day of July to Reserve Bank of India.
e. A person resident in India other than a resident individual making any OPI or transferring such OPI by way of sale shall report such investment or transfer of investment within sixty days from the end of the half-year in which such investment or transfer is made as of September or March-end.
f. In case a person resident in India has made a delay in filing/submitting the requisite form/return/document, such person may file/submit the requisite form/return/ document, etc. and pay the Late Submission Fee (LSF) at the rates and in the manner prescribed by RBI.
For further details please refer the attached documents.
Source: Reserve Bank of India
