1. Introduction to Overseas Investment Framework

The Overseas Investment (OI) Rules, 2022, provide comprehensive guidelines for both Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI). These rules are further supported by regulations and directions issued by the RBI, ensuring the proper management of foreign exchange in alignment with India's economic interests.

2. Key Definitions: Odi and Opi

Overseas Direct Investment (ODI) refers to investments in unlisted equity capital or control over 10% of a listed foreign entity’s equity capital. ODI is distinguished by significant involvement, such as controlling the entity's management decisions or holding board positions.

Overseas Portfolio Investment (OPI), on the other hand, involves investment in foreign securities, excluding unlisted debt instruments. OPI is for those entities or individuals looking for financial gains without direct control over management decisions.

3. Routes for Overseas Investment

Automatic Route: Most investments can be made under the automatic route, meaning they do not require prior approval from the RBI. Indian entities and individuals can invest directly in a foreign entity through established mechanisms like subscriptions or purchases.

Approval Route: However, for certain investments exceeding USD 1 billion in a financial year or those involving sensitive sectors, prior approval from the RBI is mandatory.

4. Restrictions on Certain Activities

The new framework places explicit restrictions on overseas investments in:

Real Estate and Gambling: Investments in foreign entities involved in real estate or gambling activities are strictly prohibited. This includes the buying and selling of real estate properties abroad unless it involves construction and development for business purposes.

Financial Products Linked to INR: Investments in foreign financial products that are linked to the Indian Rupee are prohibited unless expressly approved by the RBI.

5. Investment in Startups

A notable feature of the new rules is the encouragement for Indian entities to invest in startups recognized under the laws of the host country. This provision allows Indian businesses to leverage global startup ecosystems. However, these investments can only be made using internal accruals, ensuring that external borrowings are not directed toward risky ventures.

6. Round-tripping Provisions

One of the most important aspects of the new regulations is the restriction on round-tripping, where an Indian entity invests abroad, and that foreign entity, in turn, invests back in India. Such structures are discouraged to prevent complex ownership models that could potentially result in tax evasion. Indian companies are restricted from setting up structures with more than two layers of foreign subsidiaries for investment back into India.

What is allowed: Have an Individual make an entity (LLP/ Pvt Co.) in India which then invests in an entity outside India. This foreign entity is now allowed to hold shares in India.

Sounds complicated? It isn’t when you have an expert supporting you.

7. Financial Commitments and Guarantees

Indian entities can make financial commitments through debt instruments or guarantees. These commitments are, however, capped at 400% of their net worth, based on their latest audited financial statements. Additionally, Corporate Guarantees are allowed but cannot exceed the financial commitment limits.

Personal Guarantees by promoters or group company guarantees can also be extended under certain conditions.

8. Reporting and Compliance Obligations

Investors are obligated to follow stringent reporting requirements to ensure transparency and regulatory compliance. These include:

Form FC: This form must be submitted when making a financial commitment abroad.

Annual Performance Report (APR): To be submitted annually, especially for investments where the Indian party holds significant control.

Disinvestment: Disinvestment from foreign entities must be reported within 30 days of receiving proceeds, ensuring a clear track of all financial inflows and outflows.

Non-compliance can result in penalties, including a Late Submission Fee (LSF) mechanism, which has been clearly laid out by the RBI.

9. Investment in Ifsc

Indian entities and individuals are now allowed to make investments in International Financial Services Centres (IFSC) located in India. This enables businesses to leverage the favorable tax and regulatory environment of IFSCs for international transactions, without needing to set up operations abroad.

10. Provisions for Individuals Under Lrs

Resident individuals in India can invest abroad under the Liberalized Remittance Scheme (LRS). The LRS limit currently stands at USD 250,000 per financial year. These investments can be made directly in foreign securities or startups abroad, though individuals are advised to ensure compliance with reporting requirements under FEMA.

11. Compounding of Offenses

In case of violations of the ODI or OPI guidelines, businesses or individuals may seek to compound the offense. The RBI has issued clear compounding orders, which provide a mechanism to resolve non-compliance issues by paying a pre-determined penalty, based on the nature and severity of the violation.

Understanding the nuances of the ODI and OPI rules is essential for businesses seeking growth opportunities abroad while maintaining compliance with Indian law.

Reach out to us if you have any queries.