RBI rationalizes regulatory framework on Overseas Investment; Proposes segregation of regulatory and the operational part in rules and regulations respectively

[2021] 129 taxmann.com 232 (Article)

Investments by Indian entities outside India is a very common phenomenon and several companies have a presence outside India by virtue of forming a Joint Venture (‘JV’) and Wholly Owned Subsidiaries (‘WOS’)

With the enforcement of amendment proposed in Finance Act, 2015 in October, 20191 powers vested with Central Government (CG) and Reserve Bank of India (RBI) with respect to permissible Capital Account Transaction were revisited. Power to frame rules relating to Non-Debt instruments (‘NDI’) was vested with CG and to frame regulations relating to debt instruments were vested with RBI. The scope of NDI inter alia covers all investment in equity instruments in incorporated entities: public, private, listed and unlisted; acquisition, sale, or dealing directly in immovable property.

RBI intends to combine erstwhile FEMA (Transfer or Issue of Foreign Security) Regulations, 20042 (‘erstwhile ODI regulations’) and FEMA (Acquisition and Transfer of immovable property outside India) Regulations, 20153 into FEMA (Non-debt Instruments – Overseas Investment) Rules, 20214 (‘NDI Rules’) and FEMA (Overseas Investment) Regulations, 20215 (‘OI Regulations’) and has rolled out the draft regulations for public comments to be sent by August 23, 20216.

NDI Rules v/s OI Regulations

NDI Rules will provide the regulatory framework for making overseas investments covering the permissions, conditions for making overseas investment, restrictions from making Overseas Direct Investment (‘ODI’), pricing guidelines, transfer, liquidation, and restructuring of ODI. While the NDI Rules will be framed by CG, however, the same will be administered by the RBI.

OI Regulations, on the other hand, will provide only the operational part covering conditions for undertaking Financial Commitment (‘FC’), other than investment in equity capital, consideration in case of acquisition or transfer of equity capital of a Foreign Entity (‘FE’), mode of payment, obligations of Persons Resident in India (‘PRII’), reporting requirements, a consequence of delay in reporting and restrictions on further FC/transfer.

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