Centre revamps overseas investment framework

India has announced a revamp of the overseas investment framework, including easing the rules for domestic entities wanting to invest in companies or securities abroad.

Under the new rules, the government has provided a specific definition for overseas portfolio investment (OPI), making it clear that such investments can be made in both listed and unlisted space.

The government also eased the ’round-tripping’ rules by allowing Indian entities to invest in foreign companies that may route this investment back into India provided certain transparency conditions are met. The latest rules made approval of lenders compulsory for any person or entity having non-performing assets wanting to make an overseas investment.

Acquiring a gift of foreign securities has been allowed from any non-resident outside India – previously, this was allowed only from relatives. Such transactions are subject to compliance under the Foreign Contribution (Regulation) Act, 2010.

The Foreign Exchange Management (Overseas Investment) Rules, 2022 will subsume regulations pertaining to Overseas Investments and Acquisition and Transfer of Immovable Property Outside India Regulations, 2015.

Centre revamps overseas investment framework

May Impact M&A Decisions

The consolidated rules, notified on Monday, bring in a host of changes that could impact merger and acquisition decisions of Indian residents, including startups.

“In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is a need for Indian corporates to be part of the global value chain. The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics,” the finance ministry said in a statement.

These changes have been brought about in consultation with the Reserve

.

“The new regulations are a welcome move as this (notification) clarifies some prolonged industry issues – especially outbound-inbound structures, gift of shares between residents and non-residents, clarity on portfolio investment through introduction of 10% threshold and control,” said Neha Aggarwal, director, Pricewaterhouse & Co.

Liberalising Rules

Until now, OPI was not defined explicitly and hence industry took a conservative approach that OPI was allowed only in listed foreign companies.

The government has defined OPI as an investment in a foreign company where the Indian entity owns less than 10% of equity. This would allow wealthy Indian investors and corporates to make passive investments in foreign companies.

“The concept of overseas portfolio investment has been widened and would now be available to unlisted companies as well,” said Moin Ladha, partner, Khaitan & Co.

The government has also eased the rules for overseas direct investment (ODI) and foreign direct investment (FDI) structures. Say an Indian entity invests in a foreign entity and the foreign company has business operations in India through a subsidiary- such investments were not allowed by Indian regulators on suspicions of round tripping and tax evasion. This is because Indian entities were taking money out of the country for investment through an ODI, and the investee company could bring the same money back into India through FDI in its Indian subsidiary.

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