Discussion on the new regime on Overseas Investment

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Our write up on the topic can be read here:

  1. Revised ODI Norms: A step towards greater clarity & liberalization?
  2. Lost in Layers: lower threshold for subsidiaries under ODI norms raises concern

Lost in Layers: lower threshold for subsidiaries under ODI norms raises concern

Vinita Nair, Senior Partner | Vinod Kothari & Company | corplaw@vinodkothari.com

It is quite common for entities to have subsidiaries in India and outside India in order to undertake business activities. The norms for incorporating a subsidiary in India is mainly governed by provisions of Companies Act, 2013 (‘CA, 2013’) and also the FDI norms for investment in the non-debt instruments, where the investment is being made by a person resident outside India. Similarly, the norms for incorporating a subsidiary outside India is mainly governed by provisions of CA, 2013 and also ODI norms for investment in the non-debt instruments. Additionally, there is a concept of restriction on layers of subsidiaries, prescribed under CA, 2013 and also under the new regime, which has raised cause of concern as well as confusion among India Inc., which is intended to be addressed by the author in this article. 

RBI, effective from August 22, 2022 notified norms on Overseas Investment (‘OI’) in the form of OI Rules, OI Regulations and OI Directions. Read our article on the overview of the OI norms here. Our presentation can be accessed here.

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Revised ODI Norms: A step towards greater clarity & liberalization?

FCS Vinita Nair | Senior Partner, Vinod Kothari & Company | corplaw@vinodkothari.com

Investments by Indian entities outside India is a very common phenomenon and several companies have presence outside India by virtue of forming a Joint Venture (‘JV’) and Wholly Owned Subsidiaries (‘WOS’). While the intent is to permit investment overseas, however, with reasonable fetters to ensure that money is not siphoned outside India. Hence, the prescribed limits along with approval and reporting requirements.

With the enforcement of amendment proposed in Finance Act, 2015 in October, 2019[1] 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’) were 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 immoveable property.

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Foreign nationals to comply with stringent MCA norms

– Team Corplaw | corplaw@vinodkothari.com

Our write-ups on corporate laws: https://vinodkothari.com/category/corporate-laws/

MCA amends format of Forms SH-4 and PAS-4 to insert declaration on compliance with Government approval requirement under FEMA

Changes in ECB and Trade Credits Policy due to LIBOR Transition

– Team Finserv (finserv@vinodkothari.com)

Relevant links:

  1. RBI Circular dated December 8, 2021 – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12204&Mode=0
  2. Master Direction – ECB, Trade Credits and Structured Obligations – https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
  3. Roadmap for LIBOR Transition – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12128&Mode=0

Our write-ups on financial interests – https://vinodkothari.com/category/financial-services/

Increase in FDI Limit in Insurance Companies

Corplaw Team | corplaw@vinodkothari.com

Amendment in Foreign Exchange Management (NDI) Rules, 2019 effective August 19, 2021- https://egazette.nic.in/WriteReadData/2021/229165.pdf

DPIIT Press Note on June 14, 2021 amending the FDI Policy for Insurance companies which shall be effective from date of FEMA notification – https://dpiit.gov.in/sites/default/files/pn2-2021.pdf

Consequential amendment in Indian Insurance Companies (Foreign Investment) Rules, 2015 are on May 19, 2021 – https://financialservices.gov.in/sites/default/files/Indian%20Insurance%20Companies%20(Foreign%20Investment%20)(amendment)%20Rules,%202021.pdf

Insurance (Amendment) Act, 2021 is passed on March 25, 2021 to increase FDI limit – https://financialservices.gov.in/sites/default/files/Insurance%20(Amendment)%20Act%202021%2025_3_2021.pdf

Proposed framework for overseas Investments by entities and individuals

Proposes segregation of regulatory and the operational part in rules and regulations respectively

FCS Vinita Nair |Senior Partner, Vinod Kothari & Company

Investments by Indian entities outside India is a very common phenomenon and several companies have 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, 2019[1] 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’) were 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 immoveable property.

RBI intends to combine erstwhile FEMA (Transfer or Issue of Foreign Security) Regulations, 2004[2] (‘erstwhile ODI regulations’) and FEMA (Acquisition and Transfer of immoveable property outside India) Regulations, 2015[3] into FEMA (Non-debt Instruments – Overseas Investment) Rules, 2021[4] (‘NDI Rules’) and FEMA (Overseas Investment) Regulations, 2021[5] (‘OI Regulations’) and has rolled out the draft regulations for public comments to be sent by August 23, 2021[6].

NDI Rules v/s OI Regulations

NDI Rules will provide the regulatory framework for making of overseas investment 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, consequence of delay in reporting and restrictions on further FC/ transfer.

Components of Overseas Investment

Under the erstwhile ODI regulations, currently in force, there is a concept of direct investment outside India in JV and WOS that excludes portfolio investment and FC. NDI Rules combine the two to define FC and separately defines the term Overseas Portfolio Investment (‘OPI’).  Overseas Investment (‘OI’) is FC + OPI.

The classification as ODI depends on the nature of instruments in which investment is made, the nature of the entity in which investment is made and whether control has been acquired or not.

The diagram below provides a snapshot of the same.

Approval requirement proposed

The NDI Rules provides investments that require prior approval of Central Government, RBI and NOC from lender banks/ regulatory body etc. The Erstwhile ODI Regulations only mandated prior approval of RBI in case eligibility conditions stipulated were not met by the Indian party or resident individual.

Other amendments proposed

  • ODI in technology ventures through an Overseas Technology Fund (OTF) permitted for listed IE with minimum net worth of Rs. 500 crore, for the purpose of investing in overseas technology startups engaged in an activity which is in alignment with the core business of such IE.
  • Limit of FC upto 400% of networth will not apply to FC made by “Maharatna” PSUs or “Navratna” PSUs or subsidiaries of such PSUs in foreign entities outside India engaged in strategic sectors. Strategic sectors defined to include energy and natural resources sectors such as Oil, Gas, Coal and Mineral Ores or any other sector that may be advised by CG.
  • Definition of net worth to be aligned with Companies Act, 2013.
  • Sub-limits for determination of FC (50% of performance guarantee, 100% of corporate guarantee) is proposed to be done away with.
  • Applicability of provisions in case of investments made in or by units in IFSC clarified.
  • Bona fide activity defined to mean such business activities legally permissible both in India and host jurisdiction.
  • Permissible range of 5% of the fair value arrived on an arm’s length basis as per any internationally accepted pricing methodology for valuation duly certified by a registered valuer as per the Companies Act 2013; or similar valuer registered with the regulatory authority in the host jurisdiction to the satisfaction of the AD bank provided along with period of validity of valuation certificate upto 6 months before the date of the transaction.
  • Reporting of FC and OPI to be done in distinct forms.
  • Prohibition on further FC to continue until any delay in reporting is regularized. The erstwhile ODI regulations restricted only in case of non-filing of Form APR.
  • Restriction on acquisition of immoveable property outside India will not apply in case the same is acquired on lease by PRII for a period not exceeding 5 years. Manner of transfer of immoveable properties also prescribed.
  • Source of funds for acquiring immoveable property outside India to include limit under Liberalised Remittance Scheme (LRS) and out of income/ sale proceeds of the assets, other than ODI.

 

Our other videos and write-ups may be accessed below:

YouTube:

https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg 

Other write-up relating to corporate laws:

https://vinodkothari.com/category/corporate-laws/fema/

 

 

[1] https://egazette.nic.in/WriteReadData/2019/213265.pdf

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2126&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10257&Mode=0

[4] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4024

[5] https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4023

[6] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52026

Downstream Investment Not to Result in Indirect Foreign Investment

For entities owned and controlled NRIs investing on non-repatriation basis

Updated as on August 10, 2021

Shreya Masalia | Executive

Foreign investments in equity instruments by a person resident outside India (PROI) is governed by Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules)[1] and the Consolidated FDI Policy[2] as amended from time to time. Foreign investments can be made on a repatriation basis or non-repatriation basis.

Repatriation and Non-Repatriation Basis

When the proceeds on investments made in India by a PROI can be transferred abroad after the exclusion of all applicable taxes refers to investments made on a repatriable basis and are regarded as foreign direct investment (FDI) or foreign portfolio investment based on the thresholds and other conditions laid down under NDI Rules.

In case of Investments on a non-repatriable basis, the same is not eligible to be remitted outside India (rule 2(ad) of NDI Rules r.w. para 2.1.31. of the FDI Policy, 2020). Subject to the provisions of schedule IV to the NDI Rules, investments made by a Non-Resident Indian(NRI) on a non-repatriation basis are deemed to be domestic investments and are considered on par with investments made by residents.

Downstream Investments by NRIs

Downstream Investment’ means investments made by an Indian entity or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity that has received investment from abroad. It includes entities in which a foreign entity which owns or controls more than 50% of the voting power by virtue of its investments, shareholding, or has power to appoint management of the company. Such a foreign entity is referred to as a foreign-owned and controlled company (FOCC) (explanation to rule 23 of NDI Rules r.w. Annexure 4 of the FDI Policy).

Where the investment received from an Indian company from a foreign entity is utilized to invest in the capital instrument of any other Indian company, it will be regarded as indirect foreign investment and the investor company will have to report the same in Form DI with the Reserve Bank of India within a period of 30 days from date of allotment of the equity instruments[3] (para 12 of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019).

Need for a clarification

Though the investment made by an NRI on a non-repatriation basis was considered as on par with resident investments and were treated like domestic investments, the investment made by Indian entities owned and controlled by NRIs had no specific carve-out for the same. No clarity existed as to whether such an investment would attract the reporting and other compliance requirements of downstream investments.

Regulatory Changes

To address the ambiguity mentioned above, DIPP had released a press release dated March 19, 2021[4] amending the FDI Policy to provide that any investment in Indian entities by Indian entities which are owned and controlled by NRIs shall not form part of the calculation for indirect foreign investment.

On the same lines, the Ministry of Finance, vide notification dated August 06, 2021[5] amended the NDI Rules with immediate effect and inserted a new explaination to section 23(7)(i)(A) which provides that an investment made by an Indian entity which is owned and controlled by NRI’s on non-repartriation basis shall not be considered for calculation of indirect foreign investment.

Accordingly, the investment in Indian entities by Indian entities owned and controlled by NRIs will be considered at par with resident investments.  Prior to the amendment, there was no clarity on whether what could be done directly under law was allowed indirectly too. The same has now been addressed.

[1] https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723

[2] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_1.pdf

[3] https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723

[4] https://dipp.gov.in/sites/default/files/pn1-2021.PDF

[5] 228847.pdf (egazette.nic.in)