Foreign Exchange Management (Overseas Investment) Regulations, 2022 was published by Government of India vide its official gazette notification dated August 22, 2022 on above subject. The reference is as under:
Foreign Exchange Management (Overseas Investment) Regulations, 2022
Let us learn the details in a simple way to widen our learning.
What is the purpose of these regulations?
- Financial commitment by Indian entity by modes other than equity capital,
- Financial commitment by Indian entity by way of debt
- Financial commitment by way of guarantee
- Financial commitment by way of pledge or charge
- Mode of payment.
- Obligations of person resident in India
- Reporting requirements for Overseas Investment
- Delay in reporting.
- Restriction on further financial commitment or transfer.
Let us discuss the various aspects of above delineated topics to widen our perspective.
Can an Indian entity make commitments by means other than equity capital contribution?
- Yes, debt instruments fulfill this requirement. The Indian entity can lend or invest in the debt instruments like debentures or non-fund-based facilities to or on behalf of a foreign entity including overseas step-down subsidiaries of such Indian entity subject to the following conditions: 1) Whether it is eligible to make overseas direct investment (ODI) 2) Did it make ODI in the foreign entity 3) Does it hold control of that entity at the time of investment?
- Yes, the investment in foreign non-equity is subject to a loan agreement with rate of interest settled at arm’s length transaction mode.
Can an Indian entity give a financial guarantee?
(Any knowledgeable person in finance will recollect the massive financial guarantee of nearly Rs 16000 Crores given by a leading nationalized bank and gone bust. Yes, gladly the central government underwrote this huge loss.)
As per the directions given in RBI communication.
Yes, financial guarantee may be issued on behalf of foreign entity where the Indian entity has controlling interest.
The long list given is reproduced below:
(i) corporate or performance guarantee by such Indian entity;
(ii) corporate or performance guarantee by a group company of such Indian entity in India, being a holding company (which holds at least 51 per cent. stake in the Indian entity) or a subsidiary company (in which the Indian entity holds at least 51 per cent. stake) or a promoter group company, which is a body corporate;
(iii) personal guarantee by the resident individual promoter of such an Indian entity;
(iv) bank guarantee, which is backed by a counter-guarantee or collateral by the Indian entity or its group company as above, and issued, by a bank in India.
My observation
In the case of Nirav Modi, a leading nationalized bank gave a guarantee based on the letter head of a foreign bank but did it have any counter guarantee or collateral by the Indian entity. i.e., Nirav Mody. Unfortunately, the whole matter was hushed up and no detailed discussion ever took place except placid reaction by the government.
Yes, the guarantee can also be extended by the group company but the limits of such guarantee must be counted towards its lending limit in India.
Can the guarantee be treated as open ended, meaning, forever?
No, it can’t be open ended.
The amount of such guarantee will be counted towards non-fund-based limit of the entity venturing to offer. In case of two or more entities together, the full amount of guarantee will be counted towards 100 per cent. of the amount of such guarantee shall be reckoned towards the individual limits of each of such Indian entities.
Yes, one can understand that one of the entities will skillfully escape meeting its obligations towards the foreign guarantee but others will take this as an alibi for meeting their obligations. This has been studied in Indian context where many banks combine to form consortium loans but leave the responsibility of managing the operation of the account to the leading bank, like, PNB, etc.
Roll over the limit of guarantee will not become a new encumbrance.
What about financial commitment by way of charge or pledge?
1) For pledging its share capital contributed by way of FDI for any n AD bank or a public financial institution in India or an overseas lender, for availing fund based or non-fund based facilities for itself or for any foreign entity in which it has made ODI or its step- down subsidiaries outside India or in favor of a debenture trustee registered with SEBI for availing fund based facilities for itself.
2) It can create charge by way of mortgage, pledge, hypothecation or any other identical mode on– (i) its assets in India, including the assets of its group company or associate company, promoter or director, in favour of an AD bank or a public financial institution in India or an overseas lender as security for availing of the fund- based limits. Similar treatment can be done for assets created abroad.
3) An obvious obstacle for creating the charge is that the financial institution can’t be from a country or jurisdiction in which financial commitment is not permissible under the Foreign Exchange Management (Overseas Investment) Rules, 2022.
4) Some western nations have mentioned Russia, Iran, Afghanistan, or North Korea in this list.
What about deferred payment for FDI investment?
It is permissible provided the transfer of equity or debts contribution take place with advanced transmission of foreign securities by foreign seller. A simple precaution that ensures that clean advancing of funds is not admitted.
Mode of payment
How do I pay for my investment abroad?
Long list of payment options but I shall list all applicable even to big companies operating in India, abroad etc.
From the source, (I do not want to write in my own language since RBI is very much vexed
“A person resident in India making Overseas Investment may make payment –
(i) by remittance made through banking channels;
(ii) from funds held in an account maintained in accordance with the provisions of the Act;
(iii) by swap of securities;
(iv) by using the proceeds of American Depository Receipts or Global Depositary Receipts or stockswap of such receipts or external commercial borrowings raised in accordance with the provisions of the Act and the rules and regulations made thereunder for making ODI or financial commitment by way of debt by an Indian entity.”
Let us learn, what more activity required after investing abroad.
- The investor shall submit to the AD bank share certificates or any other relevant documents as per the applicable laws of the host country or the host jurisdiction, as the case may be, as evidence of such investment in the foreign entity within six months from the date of effecting remittance or the date on which the dues to such person are capitalized or the date on which the amount due was allowed to be capitalized, as the case may be.
- Working module: 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 made before sending outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier.
- A person resident in India making ODI shall designate an AD bank and route all transactions relating to a particular UIN through such AD: Provided that where more than one person resident in India makes financial commitment in the same foreign entity, all such persons shall route all transactions relating to that UIN through the AD bank designated for that UIN.
Let us learn the onerous reporting requirements, as technically called by RBI.
Any FDI invites lot of attention from regulatory authorities since this is one of the most misused channels for diversion of funds, ranks the highest among PMLA act, FEMA etc.
The reporting is……
A designated AD bank is a must. Report at the time of sending outward remittance or making a financial commitment, whichever is earlier, disinvestment within thirty days of receipt of disinvestment proceeds, or restructuring within thirty days from the date of such restructuring.
A person making ODI, shall submit an Annual Performance Report (APR) with respect to each foreign entity every year by 31st December and where the accounting year of such foreign entity ends on 31st December, the APR shall be submitted by 31st December of the next year.
All reporting with respect to overseas investment by a person resident in India shall be made in accordance with regulation 10 of OI Regulations through the designated AD bank as per the revised reporting forms and instructions contained in the “Master Direction – Reporting under Foreign Exchange Management Act, 1999”.
Further details are available on page 6 of communication from following web site.
Foreign Exchange Management (Overseas Investment) Regulations, 2022
I also find from RBI website that “Foreign Exchange Management (Overseas Investment) Directions, 2022” were issued to simplify foreign investments by Indians to further their business, increase their exposure in foreign trade, and have the advantages of investment in foreign country with attendant advantages.
The website to learn from———–
RBI/2022-2023/110 | A.P. (DIR Series) Circular No.12 August 22, 2022
Titled “Foreign Exchange Management (Overseas Investment) Directions, 2022”
Even today’s Economic Times has some detailed discussion on this topic.
Let us learn from RBI why did it bring these directions and with which broad specifications?
“Some of the significant changes brought about through the new rules and regulations are summarized below:
(i) Enhanced clarity with respect to various definitions;
(ii) Introduction of the concept of “strategic sector”;
(iii) Dispensing with the requirement of approval for: a. deferred payment of consideration;
(iv) investment/disinvestment by persons resident in India under investigation by any investigative agency/regulatory body;
(v) issuance of corporate guarantees to or on behalf of second or subsequent level step down subsidiary (SDS);
(vi) write-off on account of disinvestment;
(vii) Introduction of “Late Submission Fee (LSF)” for reporting delays.
Now the details for comprehensive understanding.
28 paras with two annexures complete the index.
What about permission for making overseas investment?
The person intending to make any financial commitment shall fill up the Form FC as provided in the “Master Direction – Reporting under Foreign Exchange Management Act, 1999” duly supported by the requisite documents and approach the designated AD bank for making the investment/remittance.
In respect of any case under the approval route, the applicant shall approach their designated AD bank who shall forward the proposal to the Reserve Bank after due scrutiny and with its specific recommendations.
Forms will be submitted both on online/offline way. A D Bank is supposed to send the form along with its recommendations to RBI for approval.
Conclusion
RBI repeatedly updates its instructions on foreign exchange to meet the emerging needs of importers/investors/exporters.
53 circulars have been superseded with the above communication from RBI and one who is serious about the investments is expected to consult leading bankers/relevant banks and lawyers to make the transactions smooth.
I have quoted extensively from the relevant RBI communications to transmit the real spirit of the communications. Hence proper reference to RBI website to understand the revised instructions is a must.
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