[Opinion] Overseas Direct Investment under FEMA – An Analysis

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  • Last Updated on 3 October, 2022

Overseas Direct Investment

[2022] 143 taxmann.com 15 (Article)


The Ministry of Finance on 22nd August, 2022 notified the Foreign Exchange Management (Overseas Investment) Rules, 2022 (ODI Rules) which will supersede the Erstwhile Regulations. Also, RBI notified the Foreign Exchange Management (Overseas Investment) Regulations, 2022 to supplement the ODI Rules (ODI Regulations). The RBI also notified the Foreign Exchange Management (Overseas Investment) Directions, 2022 (ODI Directions). It is worth noting that the Overseas Investment by Indian Party (ies) were hitherto governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (Foreign Security Regulations) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 (Property Regulations) (collectively called Erstwhile Regulations). The need for changing and notifying Rules stems from the fact that it was long overdue and with the change in business needs, evolving needs of business entities in India and abroad, integrated global network and market, it was necessary to notify the new Rules and accordingly the Government of India in consultation with the Reserve Bank of India undertook a comprehensive exercise to simplify these Regulations. Also, it was felt that there is a need for the Indian business entity to unlock the value by being part of the global business conglomerate. This article highlights the significant changes made in the ODI Regulations with detailed analysis.

New Regime

In spirit of liberalisation and to promote ease of doing business, the Central Government and Reserve Bank of India has announced new Overseas regime superseding the earlier regime, which is given hereunder:-

(a) Central Government has issued “Foreign Exchange Management (Overseas Investment) Rules, 2022 ( Dealing with Non-Debt Instruments)
(b) RBI has issued “Foreign Exchange Management (Overseas Investment) Regulations 2022” (Dealing with Debt Instruments) under Central Government Notification no: G.S.R. 646(E)
(c) RBI has issued “Foreign Exchange Management (Overseas Investment) Directions 2022” (Dealing with Directions to be followed by Authorised Dealer-Banks) under RBI (Notification no: FEMA 400/2022-RB)

The new regime simplifies the existing framework for overseas investment by persons resident in India to cover wider economic activity and reduces the need for seeking specific approvals. The new regime will also reduce the compliance burden and associated compliance costs.

Key changes

Overseas Direct Investment (ODI)

Rule 2(1)(q) of ODI Rules

The term ODI has been defined to now expressly include inter alia 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.

Explanation: Once an investment by a person resident in India in the equity capital of a foreign entity is classified as ODI, such investment will continue to be treated as ODI even if the investment falls below 10% of the paid up equity capital or such person loses control in the foreign entity. In case of investment in debt instruments of a foreign entity, a person resident in India will be required to hold control of such foreign entity.

Comment: ODI also includes investment by way of a acquisition of unlisted equity capital of a foreign company or entity or subscription as a part of the Memorandum of Association of a foreign company or entity.

Further, in the erstwhile regulations Direct investment outside India by an Indian Party in a Joint Venture (JV) and Wholly Owned Subsidiary was covered. These terms have been changed and both JV and WOS are substituted under the new amendment with the concept term of “foreign entity” which means as entity formed or registered or incorporated outside India with limited liability. Hence, by the aforesaid meaning, investment cannot be made in any foreign entity with unlimited liability. It also includes an entity in an International Financial Services Centre (IFSC) in India.

Substitution of “Indian Entity” for “Indian Party”

The concept of Indian Party (IP), where all the investors from India in a foreign entity were together considered as IP, has now been substituted under the new regime with the concept of ” Indian Entity”, which shall mean a Company or a Limited Liability Partnership or a Partnership Firm or a Body Corporate incorporated under any law for the time being in force. Each investor entity shall be separately considered as an Indian entity.

Investments covered under Overseas Investment

Overseas Investment(OI) means Financial Commitment and Overseas Portfolio Investment by a person resident in India.

Financial Commitment means the aggregate amount of investment made by a person resident in India by way of:

(i) Overseas Direct Investment.(ODI)
(ii) Debt (other than OPI) in a foreign entity or entities in which ODI is made.
(iii) Non-fund-based facilities to or on behalf of such foreign entity or entities.

Comments: The total Financial Commitment made by an Indian entity in all the foreign entities taken together at the time of undertaking such commitment cannot exceed 400% of its net worth as on the date of the last audited balance sheet or as directed by RBI. It is pertinent to mention here that the erstwhile regulations allowed unexhausted limit of holding as well as subsidiary for reckoning the limit of 400% of the net worth of the Indian Party. The change is now only the net worth of the investor entity (Indian Entity) is to be considered. Further, Corporate Guarantees by specified group companies are allowed. However, it should be noted that they will be counted towards the utilisation of such group companies’ financial commitment.

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