Query No. 1: Whether the Transaction covers under ODI?
To answer this question, we need to read Foreign Exchange Management (Overseas Investment) Directions, 2022, Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022 notified by RBI via Notification No. FEMA 400/2022-RB dated August 22, 2022which has superseded RBI Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) abroad notified by RBI via Notification No. RBI/FED/2015-16/10, FED Master Direction No. 15/2015-16.
As per Point No. 22 of Foreign Exchange Management (Overseas Investment) Directions, 2022:
“Overseas investment by way gift and inheritance shall be categorised as ODI or OPI based on the nature of the investment, however, resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India”
As per Schedule III of Foreign Exchange Management (Overseas Investment) Rules, 2022:
1. A resident individual may make or hold Overseas Investment by way of gift and Inheritance as per the conditions laid down under this Schedule.
Therefore when a PRI acquires Shares of a Foreign Entity from a PROI via Gift, then the transaction covers under ODI and the PRI is required to comply with the reporting requirements.
Query No. 2: Significance of being Relative?
Who is a Relative?
As per Rule 2(t) of Foreign Exchange Management (Overseas Investment) Rules, 2022, a “relative” shall have the same meaning as assigned to it in clause (77) of section 2 of the Companies Act, 2013.
In case PRI and PROI are relative:
As per Schedule III of Foreign Exchange Management (Overseas Investment) Rules, 2022:
“A resident individual, without any limit, may acquire foreign securities by way of gift from a person resident in India who is a relative and holding such securities in accordance with the provisions of the Act.”
Therefore, in case a PRI and PROI are relative, then PRI can acquire foreign securities without any limit via gift.
In case PRI and PROI are not relative:
As per Schedule III of Foreign Exchange Management (Overseas Investment) Rules, 2022:
“A resident individual may acquire foreign securities by way of gift from a person resident outside India in accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010 and the rules and regulations made thereunder”
Therefore, in case a PRI and PROI are not relatives, then PRI can acquire foreign securities from PROI via gift subject to compliance with the provisions of the Foreign Contribution (Regulation) Act, 2010 and the rules and regulations made thereunder.
Query No. 3: What are the Compliance Requirement?
In terms of Regulation 10 of the OI Regulations,
a) A person resident in India,
(i) who has made Overseas Direct Investment (ODI) or is making any financial commitment or undertaking restructuring or undertaking disinvestment in a foreign entity, shall report it in Form FC
(ii) who has made ODI shall submit an Annual Performance Report (APR)
Query No. 4: What is UIN and whether UIN is mandatory in this Transaction since no money transfer is involved?
UIN stands for Unique Identification Number. Form FC is submitted along with requisite documents to AD bank for obtaining UIN on or before making initial ODI. The AD bank after due verification shall report the details in the OID application for allotment of UIN. Any remittance towards a foreign entity shall be facilitated by the AD bank only after obtaining the necessary UIN for such entity. The allotment of UIN does not constitute an approval from the Reserve Bank for the investment made/to be made in the foreign entity. The issue of UIN only signifies taking on record of the investment for maintaining the database.
Hence, UIN is not assigned by the AD Banks since no transfer of money is involved in transferring shares from PROI to PRI via Gift.
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