Regulatory Framework For Overseas Investments: Analysis Of RBI’s Master Direction On ODI And OPI.

Introduction:

The Master Direction on Overseas Investments issued by the Reserve Bank of India (“RBI”) marks a significant shift in the regulatory framework governing Indian entities’ international investments. This comprehensive directive replaces outdated concepts with modern definitions and rules, integrating the process for Overseas Direct Investment (“ODI”) and Overseas Portfolio Investment (“OPI”) within a more streamlined framework. By redefining critical terms such as “foreign entity”, “strategic sector”, and “control”, the directive aims to simplify procedures and enhance clarity. These regulations are designed to enable Indian investors to navigate the complexities of international markets effectively while aligning with contemporary financial policies.

Explanation:

1. Exemptions: General permission is granted for acquiring or transferring investments outside India under Rule 4 of the OI Rules, with specific cases not falling under these regulations.
2. Investment Permission: Indian residents can invest in various overseas instruments under general permission, including investments through Special Purpose Vehicles (“SPV”). The Form FC must be submitted to the relevant Authorized Dealer (“AD”) bank, which will process the application either under the automatic or approval route with necessary documentation.
3. Central Government Approval: Investments in Pakistan or strategic sectors require prior approval from the Central Government, to be processed by AD banks and forwarded to the RBI.
4. Reserve Bank Approval: Investments exceeding US$ 1 billion in a financial year need approval from the RBI, even within automatic route limits.
5. No Objection Certificate (NOC): Investments involving entities classified as Non-Performing Assets (“NPA”), wilful defaulters, or under investigation require a prior NOC. Guarantees issued before investigation are exempt.
6. Rights Issue and Bonus Shares: Acquisitions of equity through rights or bonus shares are not considered fresh commitments, and only rights issues need to be reported.
7. Bidding/Tender Procedure: AD banks may facilitate Earnest Money Deposit (“EMD”) and bid bond guarantees. Unsuccessful bids necessitate repatriation of amounts, with deferred payments classified as Non-Fund commitments.
8. ODI in Start-ups: Investments in start-ups should be financed by the entity’s own funds and not by borrowed funds.
9. Acquisition/Transfer by Deferred Payment: Permitted with stipulated deferment periods, with deferred payments treated as contingent liabilities.
10. Mode of Payment: Investments must be made through remittances following extant rupee payment arrangements. Special provisions apply to investments in Nepal and Bhutan.
11. Valuation Parameters: AD banks must ensure adherence to valuation norms and policies approved by the Board. Valuations and pricing procedures must be followed.
12. Transfer/Liquidation: Repatriation of investments is freely permitted under Rule 17 of the Overseas Investment Rules, excluding dues unrelated to equity or debt.
13. Restructuring: Restructuring shall involve both equity and debt while calculating losses. Certificates must clearly state losses and value reductions. Revaluation is not applied if there is no restructuring.
14. Opening of Foreign Currency Accounts Abroad: Indian entities can open and maintain Foreign Currency Accounts (“FCA”) abroad for ODI purposes, as per FEMA regulations.
15. Responsibility of Resident for ODI: Investment verification must be provided to the AD bank within six months. Failure to comply requires repatriation of funds. Form FC must be submitted for obtaining a unique identification number before making an initial investment. UIN allocation is for record-keeping and not approval.
16. Reporting Requirements: Overseas investments must be reported in accordance with RBI regulations and prescribed forms, including Form ODI and Form FC. Late submissions are subject to Late Submission Fee (“LSF”), certified by a chartered accountant when necessary.
17. Late Submission Fee: LSF depends on the nature of the reporting delay and amount involved. There are specific rules for payment and validity, with fees paid via demand draft in favour of the RBI.
18. Exclusion and Prohibition: Transactions with Special Purpose (“SP”) entities in excluded sectors or countries cannot be facilitated by AD banks. Financial commitments in SPs with more than two layers of subsidiaries are prohibited.
19. Financial Commitments: Includes ODI, debt, non-fund-based financial commitments, guarantees, and pledges. Outward remittance for debt must adhere to documentation and guidelines. Performance guarantees should be reported with the job, and security interests involve reporting and compliance.
20. Overseas Investment by Resident Individuals: Resident individuals can undertake ODI under various conditions, including control and transferability limits. ESOPs and similar schemes are part of the Liberalized Remittance Scheme limit.
21. Investments by Other Entities: Entities can invest up to stipulated caps and must comply with SEBI guidelines. Investments by trusts or societies require approval and adherence to guidelines.
22. Investments in International Financial Services Centres (IFSCs): Indian residents can invest in IFSCs with exemptions from certain restrictions, but banking or insurance entities are excluded.
23. Acquisition of Immovable Property Outside India: Property acquisition for business or residential purposes abroad can be facilitated through AD banks, subject to financial limits.
24. Operational Instructions to AD Banks: All ODI transactions must be routed through an AD Bank, with compliance to FEMA provisions and reporting requirements being the responsibility of the AD banks. They must verify transactions and ensure adherence to laws and guidelines.

Conclusion:

The Master Direction on Overseas Investments by the Reserve Bank of India[1] establishes a robust regulatory framework for Indian entities engaging in international investments. By updating and clarifying key terms and processes related to ODI and OPI, the directive aims to enhance regulatory transparency and operational efficiency. The updated framework facilitates strict compliance, especially in strategic sectors and foreign entities, fostering a well-regulated investment environment. Adherence to these guidelines will support Indian investors in managing global investment strategies while contributing to broader economic objectives.

[1] Reserve Bank of India (2023). Master Direction – Overseas Investments. [online] Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12710&Mode=0#MasterDirection [Accessed 10 August 2024].