Overview of the Regulatory Framework for Overseas Investments-

Foreign Exchange Management (Overseas Investment) Rules, 2022

Overview of Foreign Exchange Management (Overseas Investment) Rules, 2022-

Overseas Investment or Foreign Direct Investment (FDI) refers to an investment made by one entity of a
country into another, enabling capital to seek out the highest rate of return across borders. The previous
framework for overseas investment, including 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, had many limitations and lacked clarity. Given India's
position as one of the world's fastest-growing economies with a rapidly evolving business and foreign
investment landscape, there was a need for a new framework.

The Reserve Bank of India and the Central Government of India introduced a new regulation for foreign
investment. A new framework in the form of Foreign Exchange Management (Overseas Investment) Rules,
20221, Foreign Exchange Management (Overseas Investment) Regulations, 2022 2, and Foreign Exchange
Management (Overseas Investment) Directions, 2022 (OI Directions) 3 was introduced. This new framework for
foreign investment superseded the Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004 (‘FEMA 120’), and the Foreign Exchange Management (Acquisition and Transfer of
Immovable Property Outside India) Regulations, 2015.

The primary objective of the new framework is to simplify the existing regulations for overseas
investment and to promote ease of doing business in India. It brings in greater clarity on Overseas Direct
Investment and Overseas Portfolio Investment, making it easier for businesses to understand and comply with
the regulations. This revised framework is expected to encourage more foreign investment in India and support
the country's growth as a global business hub.

Foreign Exchange Management (Overseas Investment) Rules, 2022-

Foreign Exchange Management (Overseas Investment) Rules, 2022 is a significant development for
Indian companies looking to invest overseas. The rules, which were introduced by the Reserve Bank of India
(RBI) in January 2022, aim to streamline and simplify the process of making overseas investments.

Foreign Exchange Management (Overseas Investment) Rules, 2022

1
https://egazette.nic.in/WriteReadData/2022/238239.pdf
2
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12380&Mode=0
3
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT110B29188F1C4624C75808B53ADE5175A88.PDF
 Under these rules, Indian companies are allowed to make overseas investments without prior approval
from the RBI, provided they comply with certain conditions. These conditions include the following:

i. Net Worth: Indian companies looking to make overseas investments must have a minimum net worth of
Rs. 500 crore, as per the latest audited financial statements.
ii. Track Record: The Company must have a track record of making profits in the last three financial years.
iii. Compliance: The Company must have complied with all relevant laws and regulations, including those
related to foreign exchange management.
iv. Prior Investment: The Company must have made prior investments in India in the same or related field.

If a company meets these conditions, it can make overseas investments up to 15% of its net worth.
However, if the investment exceeds this limit, prior approval from the RBI is required.

The new rules also allow Indian companies to make investments in overseas joint ventures (JV) or
wholly-owned subsidiaries (WOS) without prior approval from the RBI, subject to certain conditions. These
conditions include:
The total investment by the Indian company in the JV or WOS does not exceed 400% of the Indian
company's net worth.

The Indian company does not invest in a JV or WOS in a country that is on the Financial Action Task
Force (FATF) blacklist. The JV or WOS is engaged in a business that is permitted under the automatic route of
the Foreign Exchange Management Act (FEMA).

The RBI has also provided for certain reporting requirements for companies making overseas
investments. Companies are required to report all outward remittances made for overseas investments to the
RBI within 30 days of the transaction. They are also required to submit an annual statement of overseas
investments made during the financial year by 31 July of the following financial year.

The new rules have been welcomed by Indian companies, as they streamline the process of making
overseas investments and reduce the need for prior approval from the RBI. This is expected to boost overseas
investments by Indian companies and help them expand their businesses globally.

Eligibility Criteria for Indian Companies to Make Overseas Investments-

 The first criterion is net worth. According to the new rules, Indian companies must have a minimum net
worth of Rs. 500 crore, as per the latest audited financial statements. This ensures that only financially stable
companies are able to make overseas investments.

The second criterion is a track record of profitability. Indian companies must have a track record of
making profits in the last three financial years to be eligible to make overseas investments. This is to ensure that
companies making overseas investments have a strong financial footing and are able to sustain their operations
overseas.

The third criterion is compliance with relevant laws and regulations. Indian companies must have
complied with all relevant laws and regulations, including those related to foreign exchange management. This
ensures that Indian companies making overseas investments follow the rules and regulations laid down by the
RBI and other regulatory authorities.

The fourth criterion is prior investment in India. Indian companies must have made prior investments in
India in the same or related field to be eligible to make overseas investments. This criterion is important as it
ensures that companies making overseas investments have experience in the relevant field and have a better
chance of success in their overseas ventures.

If an Indian company meets these eligibility criteria, it can make overseas investments up to 15% of its
net worth without prior approval from the RBI. However, if the investment exceeds this limit, prior approval
from the RBI is required.

To sum up, the eligibility criteria for Indian companies to make overseas investments under the Foreign
Exchange Management (Overseas Investment) Rules, 2022, are stringent but reasonable. These criteria ensure
that only financially stable and experienced companies are able to make overseas investments, which reduces
the risk of failed overseas ventures. The new rules are expected to boost overseas investments by Indian
companies and help them expand their businesses globally.

Investment Limits and Reporting Requirements under the New Rules

Under the new rules, Indian companies can make overseas investments up to 15% of their net worth
without prior approval from the RBI. However, if the investment exceeds this limit, prior approval from the RBI
is required. The investment limit is calculated based on the Indian company's latest audited financial statements.

In addition, Indian companies are required to report their overseas investments to the RBI within 30
days of making the investment. The reporting should be done through an online platform provided by the RBI.
The report should include details such as the name and address of the foreign entity, the country in which the
investment is made, the purpose of the investment, and the amount invested.

The new rules also specify reporting requirements for dividends and other returns on overseas
investments. Indian companies are required to report the receipt of dividends or other returns on their overseas
investments to the RBI within seven days of receipt of such returns. The reporting should be done through the
online platform provided by the RBI.

The RBI has also mandated that Indian companies making overseas investments must maintain proper
books of accounts and records of such investments. The books of accounts should be audited by a chartered
accountant and should be available for inspection by the RBI.

Impact of Foreign Exchange Management (Overseas Investment) Rules, 2022 on Indian Businesses-

The Reserve Bank of India (RBI) recently introduced the Foreign Exchange Management (Overseas
Investment) Rules, 2022, which allow Indian companies to invest in foreign businesses without prior approval
from the RBI. These new rules have had a significant impact on Indian businesses, both positive and negative.

One of the biggest positive impacts of the new rules is that they have made it easier for Indian
companies to expand their businesses globally. Previously, Indian companies had to go through a lengthy and
cumbersome approval process before making overseas investments. However, with the new rules in place,
Indian companies can make overseas investments up to 15% of their net worth without prior approval from the
RBI, which has streamlined the process of making overseas investments.

The new rules have also increased transparency in the process of making overseas investments. Indian
companies are now required to report their overseas investments to the RBI within 30 days of making the
investment. This ensures that the RBI has a better understanding of the flow of capital from India to foreign
countries, and can take necessary steps to regulate such investments if required.

On the other hand, the new rules have also placed stringent eligibility criteria on Indian companies
looking to make overseas investments. Companies must have a minimum net worth of Rs. 500 crore and a track
record of profitability to be eligible to make such investments. This has made it difficult for smaller companies
to make overseas investments, which could limit their ability to grow their businesses globally.

In addition, the reporting requirements for overseas investments and returns on such investments may
also increase the compliance burden for Indian companies. Companies will need to maintain proper books of
accounts and records of their overseas investments, and report on such investments within stipulated
timeframes.
 Overall, the Foreign Exchange Management (Overseas Investment) Rules, 2022, have both positive and
negative impacts on Indian businesses. While they have made it easier for Indian companies to expand their
businesses globally, the eligibility criteria and reporting requirements may make it difficult for smaller
companies to take advantage of these new rules. Nonetheless, the new rules are expected to boost overseas
investments by Indian companies and help them compete more effectively in the global market.

Conclusion-

In conclusion, the introduction of the Foreign Exchange Management (Overseas Investment) Rules,
2022 is a significant step towards promoting foreign investment in India while safeguarding the country's
interests. These rules have been formulated keeping in mind the changing global economic landscape and the
need to balance economic growth with national security concerns.

The rules provide greater clarity and transparency for foreign investors looking to invest in India, by
streamlining the approval process and reducing regulatory barriers. At the same time, they also ensure that
sensitive sectors of the economy, such as defense and strategic industries, remain protected from potential
threats.

Overall, the Foreign Exchange Management (Overseas Investment) Rules, 2022 are a positive
development for India's economy and foreign investment landscape. They are expected to provide a boost to
India's economic growth and help the country emerge as a preferred destination for foreign investors.