Context

In a bid to promote ease of doing business, the finance ministry notified the consolidated rules for overseas investment by Indian entities.

• The Foreign Exchange Management (Overseas Investment) Rules, 2022 will subsume extant regulations pertaining to Overseas Investments and Acquisition and Transfer of Immovable Property Outside India Regulations, 2015.

Background

• 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 new rules have included overseas investment in International Financial Services Centre (IFSC) by person resident in India.

Analysis

How Overseas investments are governed?

• 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.

What are the new tweaks in overseas investment norms?

• Submition of APR: Any resident in India acquiring equity capital in a foreign entity or overseas direct investment (ODI), will have to submit an Annual Performance Report (APR) for each foreign entity, every year by December 31.
  • No such reporting shall be required where a person resident in India is holding less than 10% of the equity capital without control in the foreign entity and there is no other financial commitment other than equity capital or a foreign entity is under liquidation.
• Any resident individual can make ODI by way of investment in equity capital or overseas portfolio investment (OPI) subject to the overall ceiling under the Liberalised Remittance Scheme (LRS) of the Reserve Bank.

Currently, the LRS permits $2,50,000 outward investment by an individual in a year

• The earlier case: Technology entrepreneurs and angel investors were mostly not eligible for NBFC licence. Also, financial services entities in India are subject to high compliance requirements, hence even the eligible ones were not keen on becoming an NBFC.
  • The new rules have permitted Indian entities not engaged in financial services activities but with a three year net profit track record to invest in overseas entities involved in financial services activities.
• New portfolio route: The government also created a new portfolio route through which such investors will now be able to buy less than 10% stake in foreign companies without having to float a joint venture.
  • Until now, there was only one route of investment - overseas direct investment (ODI) and this route was primarily meant for those domestic entities that wanted to form a wholly owned subsidiary (WOS) or joint venture (JV) overseas.
  • In such entities, the Indian investor will exercise some amount of control.

Prohibition

• Any Indian resident, who has been classified as a wilful defaulter or is under investigation by the CBI, the ED or the Serious Frauds Investigation Office (SFIO), will have to obtain a no-objection certificate (NOC) from his or her bank, regulatory body or investigative agency before making any overseas “financial commitment” or disinvestment of overseas assets.

Need of the move	Significance of revised regulatory framework
Evolving needs of businesses in India Increasingly integrated global market Increasing need of Indian corporates to be part of the global value chain	Easy investment: These norms make it easier for domestic corporates to invest abroad. Simplification of the existing framework for overseas investment. Alignment with the current trend: Aligned with the current business and economic dynamic. Promoting ease of doing business