GIST OF FOREIGN EXCHANGE MANAGEMENT (OVERSEAS INVESTMENT) REGULATIONS, 2022

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GIST OF FOREIGN EXCHANGE MANAGEMENT (OVERSEAS INVESTMENT) REGULATIONS, 2022

Important Definition

·         “Control” means 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 per cent. or more of voting rights or in any other manner in the entity.

 

·         “Equity Capital” means equity shares or perpetual capital or instruments that are irredeemable or contribution to non-debt capital of a foreign entity in the nature of fully and compulsorily convertible instruments.

 

·         “Foreign Entity” means an entity formed or registered or incorporated outside India, including International Financial Services Centre that has limited liability:Provided that the restriction of limited liability shall not apply to an entity with core activity in a strategic sector;

 

 

·   “Host Country” or “Host Jurisdiction” means the country or jurisdiction, including the International Financial Services Centre, in which the foreign entity is formed, registered or incorporated, as the case may be.

 

·         “Last Audited Balance Sheet” means audited balance sheet as on date not exceeding eighteen months preceding the date of the transaction.

 

·         “Overseas Portfolio Investment” or “OPI” means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.

Provided that OPI by a person resident in India in the equity capital of a listed entity, even after its delisting shall continue to be treated as OPI until any further investment is made in the entity.

 

 

·         No Objection Certificate (NOC) from the lender bank/regulatory body/investigative agency

Ø  Any person resident in India having an account appearing as a Non-Performing Asset (NPA) or is classified as wilful defaulter or is under investigation by a financial sector regulator/ investigative agency shall obtain an NOC from the lender bank/regulatory body/investigative agency.

 

·         Right issue and Bonus issue

Ø  A person resident in India, who has acquired and continues to hold equity capital in a foreign entity, he may acquire equity capital through exercise of rights or by way of bonus shares.

Ø  The acquisition of equity capital through exercise of such rights shall be reported in Form FC.

Ø  Where such person does not exercise the rights but renounces such rights in favour of a person resident in India or a person resident outside India, such renouncement shall not require reporting.

Ø  The acquisition of bonus shares shall not be treated as fresh financial commitment and will not require reporting.

 

·         ODI in startups

Ø  ODI in star-up shall not be made out of funds borrowed from others.

Ø  The AD Bank shall obtain certificate from statutory auditors/chartered accountant of the Indian entity/investor.

 

 

·         Acquisition or transfer by way of deferred payment

Ø  AD Bank will allow the deferred payment for the transaction.

Ø  Period for the deferred payment should be decided upfront.

Ø  RBI has allowed a part payment also.

Ø  The Part-payment towards consideration shall be treated as non-fund based financial commitment.

Ø  Subsequent payments towards deferred consideration shall be reported in Form FC as conversion of non-fund based financial commitment to equity.

 

 

·         Mode of Payment

Ø  Cash is not permitted.

Ø  Indian entity can make remittances to its office/branch outside India only for the purpose of normal business operations of such branch or office and such remittance shall not be utilised towards investment.

Ø  A person resident in India shall not make payment on behalf of others.

Ø  Any investment/financial commitment in Nepal and Bhutan shall be done in a manner as provided in Notification.

 

·         Obligations of the Person Resident in India

Ø  A person resident in India making ODI foreign entity engaged in a bona fide business activity, directly or through step down subsidiary or the special-purpose vehicle.

Ø  “Bonafide Business Activity” shall mean any business activity permissible under any law in force in India and the host country or host jurisdiction, as the case may be.

Ø  Overseas investment by way of capitalisation, swap of securities, rights/bonus, gift, and inheritance shall be categorised as ODI or OPI based on the nature of the investment.

Ø  where the investment, whether listed or unlisted, by way of sweat equity shares, minimum qualification shares and shares/interest under Employee Stock Ownership Plan (ESOP)/Employee Benefits Scheme does not exceed 10 per cent of the paid-up capital/stock of the foreign entity and does not lead to control, such Investment shall be categorised as OPI.

Ø  Resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India.

Ø  A person making ODI has to submit instrument of investment to AD Bank within 6 months of remittance.

Ø  A person has to make application for investment in Form FC and he will get UIN on successful submission of application.

Ø  The allotment of UIN does not constitute an approval from the Reserve Bank but it is signifies taking on record of the investment for maintaining the database.

 

 

 

 

 

·         Gift of foreign securities

 

Ø  From person resident in India- only from relatives without any limit.

Ø  From person resident outside India-in accordance with FCRA regulations.

 

Please note that there is not any process or rules provided for the same.

 

Ø  Gift by RI to NR not permissible

 

·         MFs/VCFs/AIFs

 

 

Ø  Mutual Funds (MFs) and Venture Capital Funds (VCFs)/Alternative Investment Funds (AIFs) registered with SEBI may, in accordance with paragraph 2 of schedule IV of OI Rules, invest overseas in securities as stipulated by SEBI within an overall cap of USD 7 billion and USD 1.5 billion, respectively. Further, a limited number of qualified MFs are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds, as may be permitted by SEBI. Such investment shall be considered as OPI irrespective of whether the securities are listed or not.

 

Ø  MFs/VCFs/AIFs desirous of availing this facility may approach SEBI for necessary permission. Operational modalities regarding eligibility criteria, individual limits, identification of recognised stock exchanges, investible universe, monitoring of aggregate ceilings, etc., shall be as per the guidelines issued by SEBI. General permission is available to such investors for sale of securities so acquired.

 

·         Overseas investment in an IFSC in India by a person resident in India

Ø  Following person can invest as OPI in in the units of an investment fund or vehicle set up in an IFSC.

a.       person resident in India

b.       listed Indian companies

c.       unlisted Indian entities

Ø  In the case of an ODI made in an IFSC, the approval by the financial services regulator concerned, wherever applicable, shall be decided within forty-five days from the date of application complete in all respects failing which it shall be deemed to be approved.

Ø  A recognised stock exchange in the IFSC shall be treated as a recognised stock exchange outside India.

 

 

 

·         Annual Performance Report

Ø  The Annual Performance Report (APR) shall be certified by a chartered accountant where the statutory audit is not applicable, including in case of resident individuals.

Ø  A person has to submit APR with respect to each foreign entity (On its audited account) every year by 31st December and where the accounting year of such foreign entity ends on 31st December, the APR shall be submitted by 31st December of the next year.

Ø  Where Person Resident in India does not have control in foreign entity and the laws of the host country do not provide for mandatory auditing of books of accounts. In such cases APR shall be submitted unaudited financial statements certified as such by the statutory auditor of the Indian entity or by a chartered accountant where the statutory audit is not applicable.

 

Provided that no such reporting shall be required where–

 

(i)                a person resident in India is holding less than 10 % of the equity capital without control in the foreign entity and there is no other financial commitment other than by way of equity capital; or

 

(ii)               a foreign entity is under liquidation

 

·         Delay in Reporting

 

RBI has increased the late submission fee for the FDI and ODI filings. We have tabulated the details as below.

 

Sr. No.

Type of Reporting delays

 

LSF Amount (INR)

 

1

Form ODI Part-II/ APR, FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting

7500

 

2

Form ODI-Part I, Form ODI-Part III, Form FC, or any other return which captures flows or returns which capture reporting of non-fund based transactions or any other transactional reporting

[7500 + (0.025% × A × n)]

 

A:- amount involved in the delayed reporting.

 

“N” is the number of years of delay in submission rounded-upwards to the nearest month

 


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