The Reserve Bank of India (RBI) recently issued a circular addressing ambiguities in the Foreign Exchange Management (Overseas Investment) Rules, 2022. This directive is crucial for resident individuals and listed Indian companies engaged in overseas portfolio investments. By clarifying the conditions under which such investments can be made, the RBI aims to provide greater regulatory transparency and ease of compliance.
Read: Foreign Exchange Management (Overseas Investment) Directions, 2022 – Investments in Overseas Funds
Overseas Portfolio Investment is governed by FEM (Overseas Investment) Rules, 2022 (OI Rules) read with FEM (Overseas Investment) Directions, 2022. These provides the manner in which Overseas direct investment or overseas portfolio investment can be made.
Overseas Investment rules do not permit individuals to make overseas direct investment (ODI) into financial services. The OI Rules define ODI as investment by acquisition of unlisted equity capital of a foreign entity, or investment in 10% of paid-up capital or control in listed foreign entity.
However, listed entities and resident individuals can make overseas portfolio investment (OPI) subject to certain conditions:
- Investment can be made in ‘units’ of overseas funds; and
- Fund to be regulated by the regulator for the financial sector in the host jurisdiction
These two conditions created confusion. Firstly, whether the investment in offshore funds which are not in the form of trust issuing units and are formed as body corporate issuing shares or otherwise will be treated as overseas portfolio investment as the language is restrictive stating “investment in units of any investment funds” and secondly if the manager of fund is regulated by host country and not the fund directly, whether OPI investment should be permitted or not?
Considering the diverse regulatory framework governing investment funds across various jurisdiction and to provide clarity, the Reserve Bank of India issued Circular introducing two key amendments namely:
- The restriction limiting Indian individuals and listed Indian companies investment solely in units issued by overseas funds was removed by amending FEM (Overseas Investment) Directions, 2022 wherein investment in other instruments regardless it form allowed.
- Clarity was provided w.r.t investment (including sponsor contribution) in units of any investment fund overseas, duly regulated by the regulator for the financial sector in the host jurisdiction, shall be considered as Overseas Portfolio Investment where the fund is not directly regulated but the manager of the fund is so regulated.
RBI notification being clarificatory in nature, it needs to be checked if it would provide relief to investments already made or would be applicable to investments to be made going forward. Ambiguity prevails amid clarity provided by RBI.
The article is written by Ms. Vrushali Bhave – Senior Manager and Ms. Ridhi Gada – Manager!
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