English Edition | 12 January, 2022, 12:48 PM IST | E-Paper

RBI moots easier rules for investing overseas

Synopsis
Now, the RBI is learnt to have given a recommendation to the finance ministry, saying if such step-down subsidiaries are being opened as
part of genuine and 'bona fide' expansion plans of a company, the restriction should not be applied.

Mumbai: The Reserve Bank of India (RBI) is batting for easier overseas investment norms for
Indian tech entrepreneurs and angel investors, said people with direct knowledge of the
matter. As per the current rules, if an Indian resident buys shares in an unlisted company
abroad, the foreign company cannot create any more step-down subsidiaries. This has proved
to be a hindrance for Indian entrepreneurs looking to invest in foreign startups since it
Another key recommendation restricts the scalability of such companies.

pertains to purchase of shares of a

foreign unlisted company.

Now, the RBI is learnt to have given a recommendation to the finance ministry, saying if such
step-down subsidiaries are being opened as part of genuine and 'bona fide' expansion plans of a company, the restriction
should not be applied.

Consultations with Industry

Emails sent to the RBI and the finance ministry remained unanswered until press time.

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"Indian tech entrepreneurs are constantly looking for acquisition opportunities especially in the other developing
countries; however, current rules make it very difficult to make such investments," said a person cited above. "These
investments have potential to bring dollar money back into India if the business venture succeeds."

The RBI has held extensive consultations with the industry and the recommendations are based on inputs so received,
said people cited above. Overseas investments by Indian residents fall under the ambit of the Liberalised Remittance
Scheme. "A natural outcome of growth is expansion and hence it is extremely important that the step-down subsidiaries
restriction be reconsidered," said Moin Ladha, partner, Khaitan & Co. "This will enable Indian investors to get the
advantages associated with such diversification."

Another key recommendation pertains to purchase of shares of a foreign unlisted company. RBI is learnt to have
recommended that any investment into unlisted foreign companies be considered a portfolio investment so long as the
Indian owns less than 10% equity in the company. Portfolio investments enjoy liberal rules since they are meant for
investment purposes only.

Currently, if an Indian buys shares of an unlisted foreign company, the company is presumed to be a joint venture. For
instance, say an Indian 'A' buys a few shares of ByteDance - the parent of TikTok and an unlisted startup. Indian
regulators presume that ByteDance is a JV where 'A' exerts some sort of control. Accordingly, 'A' is required to meet the
steep compliance norms under the RBI rules.

In contrast, if 'A' had invested in shares of a foreign listed company, say Microsoft, it would have been considered a
portfolio investment and would have been exempt from the compliance norms.

"It is impractical for a minority shareholder to be able to procure information or influence decisions of an overseas entity
where they hold investment," said a person with direct knowledge of the matter. "However, the current regime treats
even a minority investment as setting up or acquiring a joint venture abroad."

The industry is also learnt to have requested the RBI to reconsider several more regulations. Most important of them all
was a request to increase the cap on the LRS route. Currently under LRS, an Indian can remit a maximum of $250,000
per financial year. The industry suggested the same to be hiked to at least $350,000. However, the RBI has so far not acted
on the input, people cited above said.

Until a few years ago, outward remittance rules used to be the policy domain of RBI under the Foreign Exchange and
Management Act (Fema). In other words, RBI could tweak the rules on its own. However, in 2019 the Centre replaced
Fema with Foreign Exchange Management (Non-Debt Instruments) or NDI rules, and currently, the policymaking part of
the rules is in the hands of the finance ministry. The RBI has been assigned the role of administering the
implementation of NDI rules.

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