Discussion on the new regime on Overseas Investment
Our write up on the topic can be read here:
Our write up on the topic can be read here:
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.
Read more →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.
Read more →– Team Corplaw | corplaw@vinodkothari.com
Our write-ups on corporate laws: https://vinodkothari.com/category/corporate-laws/
– Team Corplaw | corplaw@vinodkothari.com
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Relevant links:
Our write-ups on financial interests – https://vinodkothari.com/category/financial-services/
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
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 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.
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.
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.
Our other videos and write-ups may be accessed below:
YouTube:
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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
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