By - Prashant Kataria on August 24, 2022
The Reserve Bank of India issued the Foreign Exchange Management Overseas Investment Regulations, 2022 [“Regulations”] on August 22nd 2022, to simplify the existing overseas investment framework and align with contemporary business and economic developments. These regulations will subsume extant ones, i.e., the Overseas Investments and Acquisition and Transfer of Immovable Property Outside India Regulations, 2015. The following has been addressed under these regulations:
Modes Other than Equity Capital: An Indian entity can lend or invest in any debt instrument issued by the foreign entity or extend non- fund-based commitment if they are eligible to make Overseas Direct Investment [“ODI”], and such ODI should be in the foreign entity. Furthermore, the Indian entity has acquired control of a foreign entity when making such commitments.
Debt: An Indian entity may lend or invest in any debt instruments issued by a foreign entity, provided that such loans are duly backed by a loan agreement in which the rate of interest is charged on transactions between two related parties that are conducted as if they were unrelated so that there is no conflict of interest.
Guarantee: For a guarantee to be issued on behalf of the foreign entity, the following can be issued:
Pledge or Charge: In the case of a financial commitment by way of pledge, the Indian entity can pledge the foreign entity’s equity capital, which it holds directly in a foreign entity, in favour of an Authorized Dealer [“AD”] Bank or a public financial institution in India or an overseas lender, to obtain fund-based or non-fund-based facilities for itself or any foreign entity in which it has made ODI.
The payment of the amount of consideration for the equity capital may be deferred for a specified period from the date of the agreement, provided that the foreign securities equivalent to the total consideration are transferred or issued upfront by the seller to the buyer, and the full and final consideration is under the applicable pricing guidelines.
If investment by an Indian Resident in the equity capital of a foreign entity is categorized as ODI, the investment will be recognized as ODI even if it falls below 10% of the paid-up equity capital or the person loses control of the foreign business. Furthermore, any Indian resident who has acquired and continues to hold equity capital in any foreign corporation may invest in equity capital issued by such a firm as a rights issue or be granted bonus shares under the terms and conditions outlined in these rules.
A report on Overseas Portfolio Investment or Transfer must be made within 60 days of the end of the half-year in which such investment or transfer is made, as of September or March. Furthermore, each foreign firm must submit an Annual Performance Report by December 31st every year.
A late filing fee must be paid if there is a delay in reporting. This facility is available for a maximum of 3 years from the date of filing.
An Indian Resident who has made a financial commitment to a foreign entity under the Act or its rules or regulations shall not make any further financial commitment, whether fund-based or non-fund-based, directly or indirectly, to such foreign entity or transfers such investment until any delay in reporting is rectified.
In conjunction with the Reserve Bank, the Government of India undertook a comprehensive exercise to simplify these regulations. Draft Foreign Exchange Management (Overseas Investment) Rules and Foreign Exchange Management (Overseas Investment) Regulations were also made available for public comment. Given the changing needs of Indian businesses in an increasingly connected global market, Indian corporations must participate in the global value chain.
The updated regulatory framework for foreign direct investment simplifies the existing framework for foreign direct investment and is linked with contemporary business and economic trends. Clarity on overseas direct investment and overseas portfolio investment has been introduced, and several overseas investment-related transactions that were previously subject to permission are now subject to automatic approval, considerably improving the ease of doing business.
