In view of integration in the global market and the need for the Indian corporates to make a global impact, Department of Economic Affairs has notified Foreign Exchange Management (Overseas Investment) Rules, 2022. The rules notified are forward looking and favours the Indian Corporates by simplifying the legislation and providing clarity on the issues involving Oversees Direct Investment (ODI).
Following are the amendments under the Rule:
1. Round Tripping: Round Tripping is a structure where investment is undertaken in a foreign entity which ultimately invests or has investment back in the host country. RBI through the FAQ on ODI clarified that structure requires prior approval of the RBI.
The rules prescribes that the following structure is allowed upto 2 layers of subsidiaries. A welcome move by the Government to enable the start ups and companies in India to attract investments from VCs/PE funds.
2. The rules remove the ambiguity on the Foreign Portfolio Investment (FPI) which was earlier not defined under the regulation. Investment less than ten per cent in the paid-up equity capital of a listed foreign entity or investment in paid-up equity capital of a listed foreign entity not involving control will be classified under FPI.
3. “disinvestment” means partial or full extinguishment of right, title or possession of equity capital acquired under these rules;
4. The rules has amended the conditions to be followed while making any financial commitment or undertaking disinvestment by any person resident in India who,–
(i) has an account appearing as a non-performing asset; or (ii) is classified as a wilful defaulter by any bank; or
(iii) is under investigation by a financial service regulator. The person has to obtain a No Objection Certificate from the lender bank or regulatory body or investigative agency while undertaking this transaction.
5. The rules have removed the condition of the approval of RBI in the case of restructuring of the Balance Sheet of the overseas entity involving write off of capital of more than 25% of the investment. The rules have prescribed that in cases where diminution of the entity where the original investment is more than USD 10 million or in the case where the amount of such diminution exceeds 20% of the total value of the outstanding dues, a valuation report has to be submitted.
6. The rule prescribes that 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.
7. The rule clarifies that a resident individual can acquire foreign securities by way of gift from a person resident in India who is a relative. Earlier, the foreign securities were allowed to be acquired by way of gift from any person. The Rule also specifies that a resident individual may acquire foreign securities by way of gift from a person resident outside India in accordance with FCRA .
The new rules notified are aligned with the current business and economic dynamics and will be a step towards making India a global impact creator.
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