26 August 2022
RBI notifies new Overseas Direct Investment Regulations

In view of the evolving business needs and to aid Indian corporates in their global expansion, it was the need of the hour to re-examine the Overseas Direct Investment (ODI) Regulations. With this background, the Reserve Bank of India came up with draft ODI Regulations on 9 August 2021 and invited stakeholders' feedback.

Post the above, the RBI issued the final Regulations on 22 August 2022, intending to simplify the Regulations and align the same to the current business and economic dynamics. We have summarized some of the key changes brought in by the New Regulations and their impact below:

Definitions of Overseas Direct and Overseas Portfolio Investment

The new Regulation has specifically defined the terms 'Overseas Direct Investment' or 'ODI' and 'Overseas Portfolio Investment' or 'OPI.'

ODI has been defined to include:
  • Investment by way of acquisition of equity capital of an unlisted foreign entity.
  • Subscription to the Memorandum and Association of a foreign entity.
  • Investment in 10% or more of the paid-up equity capital of a listed foreign entity.
  • Investment with control where investment is less than 10% in the equity capital of a listed foreign company.
Once an investment qualifies as ODI, it shall remain so even if the percentage requirement in the case of investment in listed company falls below 10% or if control is lost.

OPI is defined as investments other than ODI in foreign securities but not in any unlisted debt instruments or any security issued by a person resident in India who is not in IFSC. Furthermore, it is also clarified that original investment by a resident in India in the equity of a listed company would be considered as OPI even if the company is delisted.

The Regulations have specifically defined the terms 'equity capital' and clarified what constitutes debt instruments and non-debt instruments.

This is a welcome move as what constituted a portfolio investment was always a matter of debate and resulted in various hardships, especially for individual investors.

Clarification regarding gift of foreign securities
  • Under the erstwhile Regulations, general permission was granted to a resident individual to acquire foreign securities by way of a gift from a person resident outside India. However, the new Regulations require compliance with Foreign Contribution (Regulations) Act, 2010, if the gift is received from a non-relative.
  • As per the new Regulations, a resident individual can acquire foreign securities by way of a gift from:
    • a person resident in India who is a relative1 and holding such securities in accordance with the provisions of the Act.
    • a person resident outside India (PROI) in accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010 (42 of 2010) and the Rules and Regulations made thereunder.
Flexibility provided on a structure having investments in India (popularly known as round tripping structures)
  • FAQ no. 64 to the erstwhile ODI Regulations clarified that an Indian Party (IP) cannot set up a step-down subsidiary in India through its foreign entity, Wholly Owned Subsidiary (WOS) or a Joint Venture (JV). Also, IP was not permitted to invest in WOS or JV that has a direct or indirect investment in India under an automatic route.
  • As such, even bonafide transactions that resulted in the IP indirectly holding in another Indian company through its overseas investment required prior approval from RBI. This created hurdles around transactions involving outbound mergers and investments in Special Purpose Acquisition Company (SPAC), where the foreign company is already holding an investment in another Indian company or SPAC intends to invest in another Indian company.
  • The New Regulations have specifically clarified that overseas investment would be allowed in an entity that has invested or invests thereafter in an India Company. However, this should not result in a structure with more than two layers of subsidiaries. However, the same is not permitted for a resident individual who exercises control in the foreign entity.
  • This is a welcome move and would be very helpful for the start-up eco-system, which typically needs an overseas company to attract investments in the start-up.
Acquisition of stake or interest under ESOP or employee benefits or sweat equity shares
  • The erstwhile Regulations dealt only with cash as well as cashless Employee Stock Ownership Plan (ESOP) of the overseas entity. However, the new Regulations cover employee benefits as well.
  • As per the erstwhile Regulation, the permissibility and conditions thereof for a resident individual were dependent upon whether the ESOP scheme was cashless or involved remittance from India. However, under the new Regulations, such a bifurcation has been done away with. A resident being an employee/director of an Indian office/branch/subsidiary/Indian entity can acquire shares or interest of the overseas entity under ESOP, employee benefits, or sweat equity shares, subject to the condition that such plan or benefit are offered by the overseas entity globally on a uniform basis.
ODI permitted in financial services
  • Earlier, an Indian entity engaged in financial services was only permitted to make ODI into a foreign entity engaged in financial services.
  • As per the new Regulations, any Indian entity (individual not allowed) can now make ODI in a foreign entity that is directly or indirectly engaged in financial services activity, except banking or insurance, subject to the condition that the Indian entity has posted net profits during the preceding three financial years.
This move will help Indian corporates expand their investment portfolio into various financial services businesses, which is a positive move.
Purchase of immovable property outside India jointly by relatives
  • Earlier, a resident was able to acquire immovable property outside India jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.
  • Now, as per the new Regulations, a person resident in India may acquire immovable property outside India from a person resident outside India jointly with a relative who is a person resident outside India.
The condition related to the outflow of funds has been removed, which will help acquire immovable property by way of joint funding. This is a welcome proposition. However, it should be kept in mind that other restrictions for the transfer of funds as provided under Liberalized Remittance Scheme would continue to apply.
Restructuring of balance sheet
  • Earlier unlisted companies were permitted to write off capital and other receivables up to 25 % of the equity investment in the JV/WOS with prior approval of RBI.
  • This created a hurdle in bonafide cases where foreign entities were incurring losses.
  • As per the New Regulations, RBI approval is not required for restructuring of the balance sheet subject to the condition that the diminution in the outstanding value is proportionate to the number of losses. However, where the amount of diminution exceeds USD 10 million, or it exceeds 20% of the total value of the outstanding dues of an Indian company or investor, the diminution in value needs to be certified by:
    • The registered valuer as per the Companies Act, 2013 (18 of 2013) on an arm’s length basis or
    • Valuer registered with the regulatory authority or
    • Certified public accountant in the host jurisdiction.
ODI in start-ups can be made only from internal accruals
  • As per the new Regulations, any ODI in start-ups recognized under the laws of the host country or host jurisdiction, as the case may be, can 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.
  • Thus, investments in start-ups cannot be made by securing debt funding.
This seems to be a rationale step to ensure leverage is not created for investment which could be risky.
Investment in IFSC
  • Under erstwhile Regulations, investment in International Financial Services Centre (IFSC) was subject to general conditions applicable for Indian companies making ODI. However, a specific schedule has been introduced in new Regulations for investment in IFSC. The key aspects are as follows:
    • Requisite approval will have to be taken from the regulator for investment in IFSC. Regulator is to decide on the application within 45 days, else, it would be deemed approved.
      • Indian entities not engaged in the financial service sector can invest in IFSC without meeting the net profit condition.
      • A resident person is allowed to make a contribution to an investment fund or vehicle setup in an IFSC as OPI.
      • Resident individuals are allowed to invest in IFSC (except in the banking and insurance sector) and are subject to the condition that such IFSC entity does not have a step-down subsidiary.
Bonafide Business Activity
  • Under erstwhile Regulation, an Indian entity was allowed to invest in a foreign entity with a Bonafide business (directly or through a special purpose vehicle). The term Bonafide was not defined in the Regulation.
  • The new Regulation defines Bonafide business, and it would mean any business activity permissible under any law in force in India and host country or host jurisdiction. This may some extent, help to resolve the controversy around the Bonafide business.
Pricing guidelines and Valuation requirements
  • Under erstwhile Regulations, for ODI, the valuation of shares is required by a Merchant Banker (investment of more than USD 5 million) or by CA/CPA.
  • The new Regulation provides that issue or transfer of equity of foreign entity shall be subject to price arrived on an arm’s length basis as per internationally accepted pricing method and responsibility is cast on Authorized Banker (AD) banker to ensure that transaction is at arm’s length price.
  • Under erstwhile ODI Regulation, the Indian party can transfer a stake to a foreign entity only if the foreign entity has been in operation for at least one full year. Also, IP may disinvest without prior approval of the RBI, where the amount repatriated after disinvestment is less than the original amount invested subject to certain conditions; where the conditions are not met, any disinvestment resulting in a write-off of investment will require prior RBI approval.
  • Under New Regulations, the transferor to stay invested for at least one year from the date of making ODI before making any transfer/liquidation in the overseas entity; full disinvestment (other than liquidation) is permitted only when there are no equity/debt outstanding dues and no requirement of RBI approval for write off.
Deferred payment for ODI
  • Erstwhile Regulations did not allow the ODI through a deferred payment basis.
  • The new Regulation is allowed to make ODI through deferred payment subject to the following:
    • Consideration for equity capital acquired may be deferred for a definite period as provided in the agreement, and foreign securities shall be issued/ transferred upfront.
    • Valuation basis pricing guidelines to be done upfront.
    • The deferred purchase consideration is treated as part of a non-fund-based commitment.
    • The seller may indemnify the buyer up to such amount and subject to such conditions as agreed in the agreement.
  • Under erstwhile Regulations, ODI is to be reported in Form ODI and Annual Performance Report (APR) to be filed every year by 31 December in respect of each JV or WOS, no exemptions from filing APR.
  • Under the new Regulation, the following needs to be noted:
    • ODI is to be reported in Form FS and Form OPI is notified for OPI investment by anyone other than the individual.
    • APR is continued to be filed by 31 December, however, where foreign companies accounting year ends on 31 December, APR is to be filed by 31 December next year.
    • Form APR would not be required where there is only one resident Individual investor in a foreign company and he neither holds control in a foreign entity nor has more than 10% of the shares.
    • In case more than one Indian resident has invested in the same foreign entity, the Form APR must be filed by a person resident in India with the highest stake in the foreign entity.
To summarize, the government has taken several steps for ease of doing business, encouraging investment abroad, and increasing its global presence. The new Regulations have brought much needed clarity to overseas investment.

1. Relative will have same meaning as per the Companies Act, 2013.
USA | Canada | Poland | UAE | India | Hong Kong | Japan
This alert contains general information which is provided on an "as is" basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This alert should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this alert is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship.

Whilst every effort has been made to ensure the accuracy of the information contained in this alert, the same cannot be guaranteed. We accept no liability or responsibility to any person for any loss or damage incurred by relying on the information contained in this alert.

© 2022 Nexdigm. All rights reserved.