Home / News / India /  FinMin in consultation with RBI amends overseas investment rules. Details here

The government in consultation with RBI undertook a comprehensive exercise to simplify overseas investment rules. The Centre has announced an amendment in the Foreign Exchange Management (Overseas Investment) Rules. The new amendments have come into effect from Monday onward.

Currently, the overseas investment by a person resident in India is governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

In its statement on Monday, Finance Ministry said, "In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is a need of 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."

"Clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment-related transactions that were earlier under approval route are now under automatic route, significantly enhancing "Ease of Doing Business," FinMin added.

Here are some of the amendments under the overseas investment rule.

Under the new amendment, the net worth of a registered partnership firm or LLP will be the sum of the capital contribution of partners and undistributed profits of the partners after deducting therefrom the aggregate value of the accumulated losses, deferred expenditure, and miscellaneous expenditure not written off, as per the last audited balance sheet.

Meanwhile, the amendment guides where investment by a person resident in India in the equity capital of a foreign entity is classified as ODI (Overseas Direct Investment), such investment will continue to be treated as ODI even if the investment falls to a level below 10% of the paid-up equity capital or such person loses control in the foreign entity.

Further, any Indian resident who has acquired and continues to hold equity capital of any foreign entity --- can invest in the equity capital issued by such entity as a rights issue; or may be granted bonus shares subject to the terms and conditions under these rules.

Also, RBI if necessary may in consultation with the central government -- stipulate the ceiling for the aggregate outflows during a financial year on account of financial commitment or Overseas Portfolio Investment. Further, RBI can stipulate the ceiling beyond which the amount of financial commitment by a person resident in India in a financial year shall require its prior approval.

Any Indian resident whose account is classified as non-performing assets, or as a wilful defaulter by any bank, or is under investigation by a financial service regulator -- will have to obtain a 'No Objection Certificate' from the lender bank or regulatory body or investigative agency before making any financial commitment or undertaking disinvestment.

The amendment states that the pricing will be on an arm’s length basis. It said, "The AD bank, before facilitating a transaction under sub-rule (1), shall ensure compliance with arm’s length pricing taking into consideration the valuation as per any internationally accepted pricing methodology for valuation."

Moreover, any Indian resident may transfer equity capital by way of sale to a person resident in India, who is eligible to make such investment under these rules, or to a person resident outside India.

In case the transfer is on account of the merger, amalgamation, or demerger or on account of buyback of foreign securities, such transfer or liquidation shall have the approval of the competent authority as per the applicable laws in India or the laws of the host country or host jurisdiction, as the case may be.

No person resident in India shall make a financial commitment to a foreign entity that has invested or invests in India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries, as per the amended rule.

An Indian entity having an overseas office may acquire immovable property outside India for the business and residential purposes of its staff.

Meanwhile, an Indian resident may acquire immovable property outside India from a person resident outside the country by way of inheritance, purchase out of foreign exchange held in RFC account; purchase out of the remittances sent under the Liberalised Remittance Scheme instituted by RBI; jointly with a relative; out of the income or sale proceeds of the assets, other than ODI.

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 the condition that such Indian entity has posted net profits during the preceding three financial years.

Notably, an Indian entity not engaged in the insurance sector may make ODI in general and health insurance where such insurance business is supporting the core activity undertaken overseas by such an Indian entity.

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