The central government has, in consultation with the Reserve Bank of India (“RBI”) revamped the regulatory regime governing overseas investment from India and has introduced an entirely new regulatory framework. The Ministry of Finance has issued the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“Rules”) pursuant to Section 46 (power to make rules) of the Foreign Exchange Management Act, 1999 (“FEMA”) which primarily governs overseas non-debt investment framework and the RBI has issued the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“Regulations”) and the Foreign Exchange Management (Overseas Investment) Directions, 2022 (“Directions”) which primarily govern overseas debt investment framework. The Rules, Regulations, and Directions shall together be referred to as the “New Framework”.
The New Framework supersedes the erstwhile overseas direct investment regime governed under 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.
We summarise some of the key changes brought in by the New Framework:
(i) The introduction of the definition of a ‘foreign entity’ which refers to ‘an entity formed or registered or incorporated outside India including an International Financial Services Centre (“IFSC”) in India that has limited liability’.
(ii) The introduction of the definition of ‘Indian Entity’. Earlier all investors from India in a foreign entity were together considered as an ‘Indian Party’, but now each investor entity will be separately considered as an Indian entity.
(iii) The introduction of the definition of ‘control’ as the right to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten percent or more of voting rights or in any other manner in the entity.
(iv) The introduction of the definitions of the terms overseas direct investment and overseas portfolio investment. Overseas direct investment has been defined to mean investment: (i) by way of acquisition of any unlisted equity capital or subscription as a part of the memorandum of association of a foreign entity; (ii) an investment in ten percent or more of the paid up equity capital of a listed foreign entity; or (iii) investment with control where investment is less than ten percent of the paid up equity capital of a listed foreign entity. Overseas portfolio investment on the other hand primarily means overseas investments other than overseas direct investment in foreign securities (except in unlisted debt securities or securities issued by Indian residents (except IFCSs)). Schedule I and II to the Rules provides for the manner in which overseas direct investment and overseas portfolio investment can be made by an Indian Entity.
(v) The introduction of the ability of Indian entities not engaged in a financial services sector in India to explore opportunities overseas by way an overseas investment in a foreign entity which is directly or indirectly engaged in financial services activity (other than banking and insurance) subject to specified conditions. Similarly, an Indian entity not engaged in the insurance sector has now been permitted to undertake an overseas investment in general and health insurance subject to compliance with stipulated conditions.
(vi) The introduction of the requirement of a no objection certificate in case the person resident in India who is seeking to invest outside India has an NPA or is classified as a wilful defaulter by any bank or is undergoing investigation by any investigation agency namely the Central Bureau of Investigation, Directorate of Enforcement and the Serious Frauds Investigation Office or a financial service regulator. The investigating agency or lender bank is required to respond to such written applications for an NOC within 60 (Sixty) days, beyond which will be considered deemed consent to the proposed transaction.
(vii) The introduction of the term ‘strategic sector’ which includes energy and natural resources sectors such as oil, gas, coal, mineral ores, submarine cable system and start-ups, and any other sector or sub-sector as deemed fit by the central government. In instances where the foreign entity’s core activity lies in any strategic sector, the restriction of limited liability structure of the foreign entity shall not be mandatory. Accordingly, overseas direct investment in unincorporated companies operating in such strategic sectors has been permitted.
(viii) The introduction of the requirement to submit a valuation report in cases where diminution of the entity where the original investment is more than USD 10 million or in the case where the amount of such diminution exceeds 20% of the total value of the outstanding dues. This has removed the condition of the approval of RBI in the case of restructuring of the balance sheet of the overseas entity involving write off of capital of more than 25% of the investment.
(ix) The provision for a resident individual, who is an employee or a director of an office in India or branch of an overseas entity or a subsidiary in India of an overseas entity or of an Indian entity in which the overseas entity has direct or indirect equity holding, to acquire, without limit, shares or interest under ESOP or employee benefits scheme or sweat equity shares offered by such overseas entity, provided that such issues are offered by the issuing overseas entity globally on a uniform basis.