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Regulatory Insights

24 August 2022
Overseas Investment Rules and Regulations announced – Key highlights

Background

1
The Government of India, in consultation with the RBI, has notified the Foreign Exchange Management
(Overseas Investment) Rules, 2022 (ODI Rules) and Foreign Exchange Management (Overseas Investment)
3
Regulations, 2022 (ODI Regulations)2. The RBI has also issued the Foreign Exchange Management
(Overseas Investment) Directions, 2022, providing detailed operational instructions (ODI Directions) (jointly
referred as [ODI Guidelines]).

The ODI Guidelines will govern investment in overseas entities or immovable property outside India by persons
resident in India and will replace 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.

Key Highlights of the ODI Guidelines

1. Definitional clarity introduced

The ODI Guidelines have introduced various concepts and terms for the first time, some of which are as
follows:

a. Overseas Investment (OI), Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI)

b. Overseas investment in Equity capital, Debt instruments and through non-fund-based facilities

c. Control

d. Foreign entity (in place of the erstwhile overseas JV/ WOS)

e. Subsidiary or Step-down subsidiary (SDS) of the Foreign Entity

f. Bona fide business activity

1
Ministry of Finance (Department of Economic Affairs) Notification G.S.R. 646(E) dated 22 August 2022
2
FEMA Notification No. FEMA 400/2022-RB dated 22 August 2022
3
A.P. (DIR) Circular No. 12 dated 22 August 2022

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g. Financial services (FS) activity

2. Structure of the Guidelines

a. The ODI Rules govern investment in equity and immovable property, and the ODI Regulations govern
investment in debt instruments.

b. The ODI Rules have general provisions applicable to all overseas investments in equity capital and specific
schedules for different classes of investment, viz.

i. ODI by Indian Entity (Schedule I)

ii. OPI by Indian Entity (Schedule II)

iii. OI by Resident Individuals (Schedule III)

iv. OI by Others (AIF, Mutual Funds, VCF, Trusts and Societies) (Schedule IV)

v. OI in IFSC (Schedule V)

3. Saliant provisions

a. Liberalisation

i. Persons resident in India can make financial commitment in a Foreign Entity that has invested or
invests into India, at the time of making such financial commitment or at any time thereafter, either
directly or indirectly, provided the same does not result in a structure with more than two layers of
subsidiaries.

ii. ODI in FS sector

- Three-year profit track record (no requirement of profit being from FS sector activity).

- The Indian entity may be registered with or regulated by an FS regulator.

- ODI by non-FS sector entity in FS sector entity (other than banking or insurance) permitted, subject
to three-year profit track record (exemption available for COVID-19 period).

- Indian Entity not engaged in the insurance sector can make ODI in general and health insurance
where such insurance business supports the core activity undertaken overseas by such an Indian
entity.

iii. OI by Resident Individuals (within overall permitted limited under the Liberalised Remittance Scheme
[LRS]) –

- Mode of investment includes capitalisation, swap, right or bonus issue, gift, inheritance, sweat
equity shares, qualification shares and ESOP or Employee Benefit Scheme.

- ODI is an operating entity not engaged in FS activity and which does not have a subsidiary or SDS
where the resident individual has control in the foreign entity.

- LRS limit not to apply to ODI by way of inheritance, gift, sweat equity shares or ESOP scheme.
However, remittance for sweat equity shares and ESOP would get counted towards the LRS limit.

iv. Issuance of corporate guarantees to or on behalf of second or subsequent level SDS permitted.

v. Restructuring of balance sheet and write-off on account of disinvestment liberalised.

vi. Transfer on account of merger, amalgamation or demerger or buyback or liquidation permitted under
automatic route.

vii. Deferred payment of consideration for transfer of shares permitted under automatic route, subject to
certain conditions.

viii. Investment or disinvestment by persons resident in India under investigation by any investigative
agency or regulatory body permitted, subject to obtaining of NOC.
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b. Restrictions

i. Companies with NPA or declared as wilful defaulters or under investigation by financial regulators or
investigative agencies to require prior NOC for making ODI.

ii. ODI in a Foreign Entity engaged in gambling in any form or dealing with financial products linked to the
Indian rupee prohibited. Real-estate activity continues to be prohibited.

iii. ODI in start-ups permitted only out of internal accruals and not out of borrowed funds.

iv. Gift of shares of Foreign Entity permitted from a resident who is a relative (as defined in the Companies
Act, 2013) or from a non-resident in compliance with the provisions of the Foreign Contribution
(Regulation) Act, 2010.

v. The concept of utilising the net worth of the subsidiary or holding company by the Indian entity has
been discontinued. For computing the financial commitment limit of the group company, any fund-
based exposure of such group company to the Indian entity or of the Indian entity to such group
company, as the case may be, will be deducted from the net worth of such group company.

vi. For making financial commitment by way of debt, the Indian Entity to have control in the Foreign Entity.
Debt instruments issued by the Foreign Entity should be backed by loan agreements, and rate of
interest to be charged on an arm’s length basis.

c. Others

i. Net worth definition aligned with the definition provided in the Companies Act, 2013 –– Net worth would
now include security premium as well.

ii. Investment in Strategic Sector given wide latitude.

iii. Investment in Pakistan or any other jurisdiction advised by the Government of India require prior
government approval.

iv. All transactions will be subject to valuation on arm’s length basis as per internationally accepted
standards – AD bank to have its board approved policy for implementation. Exemption from valuation
requirements provided in certain cases.

v. OI in IFSC

- Investment in IFSC – The concerned FS regulator needs to process the application for investment
within 45 days from the date of receipt of application that is complete in all respects, failing which it
will be deemed to be approved.

- Non-FS Indian entity making ODI in an entity directly or indirectly engaged in FS, (except banking
or insurance) permitted to make ODI in IFSC. Profit track record not required.

- Contribution to investment fund or vehicle in IFSC considered as OPI.

- Resident Individual may make ODI including in the FS entity (except insurance and banking) in the
IFSC if it does not have subsidiary or SDS outside IFSC where the Resident Individual has control
in the Foreign Entity.

d. Reporting obligations

i. UIN now needs to be obtained prior to making first remittance or acquisition of equity capital in a
Foreign Entity, whichever is earlier.

ii. APR filing only if ODI investment is made by a person resident in India holding more than 10% of equity
capital or has control in the Foreign Entity or has any other financial commitment in the Foreign Entity
other than by way of equity.

iii. Late Submission Fee (LSF) introduced for delays in reporting up to three years.

iv. The ODI Regulations prohibit additional financial commitment in a foreign entity or transfer of such
investment till any delay in reporting has not been regularised.
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Note: This summary only captures the key highlights of the changes. There may be other changes which have
not been captured here and other nuances to the guidelines that require further analysis of the provisions.

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