The Finance Ministry recently released the Foreign Exchange Management (Overseas Investment) Rules, 2022 subsuming extant regulations for Overseas Investments and Acquisition and Transfer of Immovable Property outside India Regulations, 2015.
An overseas investment by a person resident in India is governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.
The Central Government in consultation with the Reserve Bank of India has framed Outward Investments Rules. These are in line with the amendment in the Foreign Exchange Management Act 2015.
The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics.
The tweaks in overseas investment norms:
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 clarified that structure requires prior approval of the RBI.
The rules prescribes that the following structure is allowed up to 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.
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.
The rules has amended the conditions to be followed while making any financial commitment or undertaking disinvestment by any person resident in India who,–
has an account appearing as a non-performing asset;
is classified as a wilful defaulter by any bank;
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.
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 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.
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.