Govt. investmentoverseastweaksnorms; simplifies the existing framework for making investments outside India
Govt. investmentoverseastweaksnorms: simplifies the existing framework for making investments outside India
4 Contents X ‘Overseas Portfolio Investment’ has been defined to remove the ambiguity 6 X Investment in 10% or more of the paid-up equity capital of a listed foreign entity will amount to ODI 6 X Certain amounts not to be carved out from the limit of the financial commitment 7 X Recognition of payment on a deferred basis for acquisition or transfer under ODI 7 X Relaxation in the timelines for repatriation of dues receivable from a foreign entity to India 8 X Reporting of the Annual Performance Report rationalised 8 X Provisions regarding Late Submission Fees (LSF) prescribed in the regulations itself 8 X ‘Disinvestment’ defined 9 X Disinvestment norms rationalised 9 X No further financial commitment/transfer is allowed until delay in reporting is regularised 9 X Entities under investigation are allowed to make ODI 9 X NPA account holders/wilful defaulters are required to obtain NOC from lender bank before making ODI 10 X Arm’s length pricing to be followed for issue/transfer of foreign entity’s equity in place of fair value 10 X Net Worth calculation norms prescribed for registered Partnership firms and LLPs 10 X Meaning of ‘Debt instruments’ & ‘Non-debt instruments’ are defined in the ODI regulations 11 X Investment in foreign entity which has made investment in India (commonly known as ODI-FDI Structure) is now permitted subject to conditions 11 X Portfolio investment by Resident Individuals governed under New Norms now 11 X Investment in Financial services liberalised 12 X New terms defined 12 X Few definitions have been amended 12 X New reporting forms have been notified 12
About the Notification
The RBI vide Notification No. G.S.R 646(E) & FEMA 400/2022-RB, dated 22.08.2022 has notified the Foreign Exchange Management (Overseas Investment) Rules,2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022 [together referred as “New Norms”].
5 Summary
The new norms aim to simplify and liberalise the existing framework for overseas investment by a person resident in India to cover wider economic activity and significantly reduce the need for seeking specific approvals thereby significantly increasing the ease of making investment outside India. The Foreign Exchange Management (Overseas Investment) Rules, 2022 subsumes extant regulations pertaining to Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015.
2. Investment in 10% or more of the paid-up equity capital of a listed foreign entity will amount to ODI
The definition of the term “Overseas Direct Investment” has been revamped. As per the new norms, the term “Overseas Direct Investment” means investment by way of : X In case of unlisted entity : acquisition of unlisted equity capital of a foreign entity, or subscription as a part of the memorandum of association of a foreign entity,
Investment in 10% or more of the paid-up equity capital of a listed foreign entity will amount to ODI
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The definition of the term “Overseas Direct Investment” has been revamped. As per the new norms, the term “Overseas Direct Investment” means investment by way of :
In case of unlisted entity : acquisition of unlisted equity capital of a foreign entity, or subscription as a part of the memorandum of association of a foreign entity, In case of listed entity: investment in 10%, or more of the paid-up equity capital of a listed foreign entity or investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
1. ‘Overseas Portfolio Investment’ has been defined to remove the ambiguity Earlier, the term ‘Overseas Portfolio Investment’ was not defined in the ODI regulations which brought lot of confusions with regard compliance and categorization of investment. Now, the same has been defined. As per the new norms, the term “Overseas Portfolio Investment” means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.
3. Certain amounts not to be carved out from the limit of the financial commitment Certain carve outs like Balance held in Exchange Earners Foreign Currency Account (EEFC), foreign currency proceeds through ADR and GDR/Stock-swap of such receipts have not been restored for calculation of limit of financial commitment. Earlier, all such amounts were not included in the calculation of limit of total financial commitment.
X In case of listed entity: investment in 10%, or more of the paid-up equity capital of a listed foreign entity or investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
4. Recognition of payment on a deferred basis for acquisition or transfer under ODI As per the new norms, the payment of consideration for the equity capital acquired can be deferred for a definite period of time under the following conditions –X the foreign securities equivalent to the amount of total consider ation shall be transferred or issued by the seller to the buyer; X the full consideration finally paid shall be compliant with the applicable pricing guidelines.
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X Earlier, the payment on a deferred basis for acquisition or transfer was not allowed.
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Earlier, the provisions w.r.t Late Submission Fees (LSF) were not prescribed in the ODI regulations. As per the new norms, the same has been prescribed now.
6. Reporting of the Annual Performance Report rationalised As per the new norms, the following entities are exempted from submission of the Annual Performance Report –X a person resident in India is holding less than 10 per cent. of the equity capital without control in the foreign entity and there is no other financial commitment other than by way of equity capital X a foreign entity is under liquidation.
Relaxation in the timelines for repatriation of dues receivable from a foreign entity to India
Earlier, an Indian Entity was required to repatriate to India all dues receivable from a foreign entity, like dividends, royalty, technical fees etc, within 60 days of its falling due or such further period as RBI may permit. As per the new norms, an Indian Entity can repatriate to India all dues receivable from a foreign entity within 90 days of its falling due or from the date of transfer or disinvestment. A relaxation of a further period of 30 days is allowed now.
7. Provisions regarding Late Submission Fees (LSF) prescribed in the regulations itself
10. No further financial commitment/transfer is allowed until delay in reporting is regularised
A person resident in India is not allowed to make any further financial commitment towards a foreign entity or transfer any investment till any delay in reporting is regularised.
11. Entities under investigation are allowed to make ODI Earlier, entities under investigation by CBI/ED/SFIO were not allowed to make ODI. As per the new norms, the entities under investigation by CBI/ED/SFIO are allowed to make ODI after obtaining a No Objection Certificate (NOC) from the investigation agency. In case if the regulatory body or investigative agency concerned fails to furnish the certificate within 60 days from the date of receipt of such application, it may be presumed that there was no objection to the proposed transaction.
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8. ‘Disinvestment’ defined Earlier, the term ‘disinvestment’ was not defined in the ODI regulations. Now, the same has been clearly defined in the regulations. As per the new norms, the term ‘disinvestment’ means partial or full extinguishment of right, title or possession of equity capital acquired under these rules.
9. Disinvestment norms rationalised
Stringent provisions with regard to requirement of obtaining RBI’s approval in case of disinvestment with write off has been done away with. The New norms provides for disinvestment subjected to pricing guidelines, documentation and reporting requirements. There is no requirement to obtain the RBI’s approval now.
Under new norms, a person resident India who has account appearing as NPA or is classified as willful defaulter by any bank shall obtain NOC from lender bank before making any financial commitment or undertaking disinvestment.
NPA account holders/wilful defaulters are required to obtain NOC from lender bank before making ODI
14. Net Worth calculation norms prescribed for registered Partnership firms and LLPs
Though the term Arms Length basis have not been defined.
In case if lender bank fails to furnish the certificate within 60 days from the date of receipt of such application, it may be presumed that there was no objection to the proposed transaction.
Earlier, there was no clarity on the net worth calculation for registered Partnership firms and LLPs. As per the new norms, the method of calculation of net worth for registered partnership firms and LLPs has been specified. The net worth is to be calculated as follows Capital contribution of partners + undistributed profits of partners accumulated losses – deferred expenditure-Miscellaneous expenditure not written off.
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13. Arm’s length pricing to be followed for issue/ transfer of foreign entity’s equity in place of fair value
As per the new norms, the issue or transfer of equity capital of a foreign entity from a person resident outside India to a person resident in India or from a person resident in India to a person resident outside India shall be on the basis of price arrived at an arm’s length basis. Earlier, the pricing for issue/transfer of foreign entity was done on a fair value.
Further, the term ‘Non-debt instruments’ has also been defined. It has the same meanings as defined in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
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All these figures are to be taken on the basis of the last audited balance sheet
15. Meaning of ‘Debt instruments’ & ‘Non-debt instruments’ are defined in the ODI regulations
The term ‘debt instruments’ has been defined in the regulations. The debt instruments shall include Government bonds, corporate bonds, all tranches of securitization structure that are not equity tranches, borrowings by firms through loans and depository receipts whose underlying securities are debt securities.
16. Investment in foreign entity which has made investment in India (commonly known as ODIFDI Structure) is now permitted subject to conditions In the extant regulations, ODI-FDI Structure was permitted on case to case basis with the prior permission of RBI. In the new norms a person resident in India can make investment in a foreign entity that has invested or invests into India subject to the condition that the structure does not result in more than two layers of subsidiaries.
17. Portfolio investment by Resident Individuals governed under New Norms now Portfolio investments by resident Individuals are governed under New Norms. Earlier, Portfolio investments were governed by LRS Directions.
Various definitions like AD category 1, host country, Indian entity, Networth etc.have been modified under the new norms.
12 18. Investment in Financial services liberalised
As per the extant Regulations, Indian entity not engaged in financial service activity in India was prohibited from making investment in Financial service Sector. However, in the new norms such a restriction has been done away with. In the new Norms, an Indian entity not engaged in financial services activity in India may make ODI in a foreign entity, which is directly or indirectly engaged in financial services activity, except banking or insurance subject to conditions
New Terms defined: Control, disinvestment, equity capital, financial service regulator, foreign entity, IFSC, last audited balance sheet, listed foreign entity, listed Indian company, unlisted Indian company, ODI, relative, resident individual, RFC, SEBI, society, subsidiary, strategic sector (energy and natural resources), Sweat equity shares, trust, venture capital, bonafide business etc. .
The form in which the reporting needs to be done have been changed.
Form FC is notified for reporting by a person resident in India who has made Overseas Direct Investment (ODI) or is making any financial commitment or undertaking restructuring or undertaking disinvestment in a foreign entity and Form FPI is notified for reporting OPI by a person resident in India other than individuals.
19. New terms defined
21. New reporting forms have been notified
20. Few definitions have been amended
A Lot of terms have been defined which were not defined like in earlier regulations.
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