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How Will Indian Investors Benefit From Revised Overseas Investment Rule

Anish Shah, Associate Partner
M&A Tax and Regulatory
|

24 August 2022

To promote ease of doing business, in consultation with RBI, the central government simplified the procedures and rationalised rules under the Foreign Exchange Management Act, 1999 for overseas investment.

The revised overseas investment rules bring in the much-needed clarity in terms of Indian entities extending debt and financial commitment to foreign firms. Further, the revised guidelines have simplified the way Indian business and individuals can invest in overseas companies. To promote ease of doing business, in consultation with RBI, the central government simplified the procedures and rationalised rules under the Foreign Exchange Management Act, 1999 for overseas investment.

RBI highlighted that the regime simplifies the existing framework for overseas investment by persons resident in India to cover wider economic activity and significantly reduces the need for seeking specific approvals. This will reduce the compliance burden and associated compliance costs.

Some of the key changes were - investment by a person resident in India in the equity capital of a foreign entity is classified as ODI (Overseas Direct Investment), also allowing Indian resident investment in rights issue or receive bonus shares in foreign entity.

Also, the government introduced a 'late submission fee' for reporting delays. Further, dispensed the approval requirement for deferred payment of consideration; investment/disinvestment by persons resident in India under investigation by any investigative agency/regulatory body; issuance of corporate guarantees to or on behalf of second or subsequent level step down subsidiary (SDS); and write-off on account of disinvestment.

Further, the government enhanced clarity with respect to various definitions, and also introduced the concept of 'strategic sector'.

According to RBI's website, overseas investments by a person resident in India enhance the scale and scope of business operations of Indian entrepreneurs by providing global opportunities for growth. Such ventures through easier access to technology, research, and development, a wider global market, and reduced cost of capital along with other benefits increase the competitiveness of Indian entities and boost their brand value. These overseas investments are also important drivers of foreign trade and technology transfer thus boosting domestic employment, investment, and growth through such interlinkages.

Here's how Indian investors will benefit from the revised overseas investment rules:

Rohin Agarwal, VP at Avener Capital said, "Indian entities in the existing corporate as well as upcoming startup space are increasingly venturing out overseas to identify new frontiers for growth. The FEMR regulations of RBI are targeted to give desired clarity in terms of an Indian entity extending debt and financial commitment to any foreign entity including its step down subsidiaries."

Meanwhile, Anish Shah, Associate Partner - M&A Tax and Regulatory Services, BDO India said, "Amongst many things, the new framework now allows investments by Indian entities into a foreign entity that has invested or invests into an Indian company, subject to safeguard on layering of subsidiaries. The new framework has also introduced the concept of Overseas Portfolio investment wherein equity investment by an unlisted Indian entity up to 10% in an unlisted foreign entity under certain situations such as rights issue, bonus issue, swap of shares, merger, etc. will not be classified as ODI resulting in relaxation of certain compliances."

Whereas, Xerxes Antia, Partner, BTG Legal said, "these new rules and regulations are intended to simplify the way in which Indian businesses and individuals can invest in global companies."

Antia added, "The emphasis in these new rules and regulations is on putting in place possible structures for global expansion and fundraising. Modalities of financial commitment by way of equity, debt, or guarantee, have been spelt out in these new regulations. There is also a provision for deferred payment for overseas acquisitions, subject to a commercial agreement. That said, total commitment for overseas investments cannot exceed 4x an Indian company’s net worth."

"To make compliance easier, late filing of returns can be done by paying a late submission fee, subject to certain limitations. The regulations also appear to address “round-tripping" issues and in limited cases permit overseas investments into foreign entities that have Indian subsidiaries," Antia added.

Lastly, Antia said, "There continue to be a few sectors in which investment is prohibited – real estate, gambling, and INR financial products. Other than these, investment in overseas start-ups (out of internal accruals) has been permitted, and existing Indian companies not engaged in “financial services" can still invest in overseas companies engaged in financial services (subject to certain conditions, such as profits in the last 3 years, etc.)."

Source: Livemint