Investing in foreign entities is an increasingly popular strategy for diversifying portfolios and capturing global market opportunities. However, the rules governing these investments, especially regarding the reinvestment of proceeds, are intricate. The primary question we address here is whether an Indian resident can reinvest the proceeds from the sale of equity shares in one foreign entity into another foreign entity without repatriating the funds to India.
Investment in foreign cam be classified as ODI and OPI and accordingly the reporting requirements are there in OI rules.
Ok! First let us understand the meaning of ODI and OPI and difference between them: –
| S.NO | OVERSEAS DIRECT INVESTMENT | OVERSEAS PORTFOLIO INVESTMENT |
| 1 | Acquisition of unlisted company or subscribing to the MOA of foreign entity
Investment in 10% or more in foreign listed company Investment with control without having 10% of paid-up equity |
Other than ODI in foreign security but not include: –
– any unlisted debt instruments; or – any security which is issued by a person resident in India who is not in an IFSC; or – any derivatives unless otherwise permitted by Reserve Bank; or – any commodities including Bullion Depository Receipts (BDRs). |
If the initial investment is in the form of Employee Stock Option, will it be covered under ODI or OPI??
As per the Schedule III of OI Rules, if the acquisition of less than 10% of equity shares is in the form of Sweat Equity, minimum qualification shares issued for holding a management post, employee Stock options, it shall be Qualified as OPI
Now, what are the repatriation requirements says: –
A person resident in India having ODI in a foreign entity, wherever applicable, shall realize and repatriate to India, all dues receivable from the foreign entity with respect to investment in such foreign entity, the amount of consideration received on account of transfer or disinvestment of such ODI and the net realizable value of the assets on account of the liquidation of the foreign entity as per the laws of the host country or the host jurisdiction, as the case may be, within ninety days from the date when such receivables fall due or the date of such transfer or disinvestment or the date of the actual distribution of assets made by the official liquidator.
Hence, it can be concluded from the above that ODI has to be repatriated into India before invested into another foreign entity.
But here is an exemption for listed Indian company in case of OPI:-
listed Indian company may make OPI, including by way of reinvestment, in accordance with schedule II of the OI Rules. ‘Reinvestment’ means that the OPI proceeds are exempted from repatriation provisions as long as such proceeds are reinvested within the time specified for realisation and repatriation
Resident individuals may make OPI within the overall limit for Liberalized Remittance Scheme (LRS) in terms of schedule III of the OI Rules and as per the FAQs given for Liberalised Remittance Scheme The investor who has remitted funds under LRS can retain and reinvest the income earned from his investments made under the Scheme. However, the received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India, as the case may be.
Therefore, in case of Overseas Portfolio investment, Repatriation is not necessary but in case of Overseas Direct Investment, repatriation is mandatory.
Manner and reporting Requirements for repatriation and reinvestment: –
On realisation of foreign exchange due, a person shall repatriate the same to India :-
- Sell it to authorised person
- Retain or hold it with authorised dealer
- use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner specified by the Reserve ban
Period for surrender:-
- foreign exchange due or accrued as remuneration for services, settlement of lawful dispute – within seven days of receipt
- in all other cases – within 90 days from date of receipt.
Conclusion:
Reinvesting proceeds from the sale of equity shares in one foreign entity into another without repatriating to India is complex and subject to specific regulations. While ODI proceeds must be repatriated, OPI offers more flexibility, especially under the LRS and for listed Indian companies. It is crucial to understand these distinctions and comply with the applicable reporting and repatriation requirements to ensure compliance with Indian regulations.
SOURCE OF DISCUSSION
- Foreign Exchange Management (Overseas Investment) Directions, 2022
- Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015
- Foreign Exchange Management (Overseas Investment) Rules, 2022;
- RBI Notification dated 22nd August, 2022
- Liberalised Remittance Scheme
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