How do RBI’s revised guidelines on Overseas Direct Investment facilitate Ease of Doing Business
Foreign Entity- The term “foreign entity” that is founded, registered, or incorporated outside of India has been substituted for the terms “joint venture” and “wholly owned subsidiary”.
It has been stipulated that such a foreign entity ought to have “limited liability” i.e., a limited liability corporation, a limited liability partnership, etc., where the responsibility of the individual residing in India is distinct and constrained. However, organisations having main activities in any key sector including the energy and natural resources sectors such as oil, gas, coal, mineral ores, submarine cable system and start-ups would not be subject to this limitation.
Overseas Direct Investment and Overseas Portfolio Investment-The following is how overseas direct investment is presently defined-
Investment through the purchase of Unlisted equity capital of a foreign business, Subscription as part of a foreign entity’s memorandum of association, or investments of 10% or more of the paid-up equity capital of a listed foreign entity are acceptable. Investments with control, where the investment is less than 10% of the paid-up equity capital of the listed foreign business, are also acceptable.
By changing the definition of an ODI, an investment in a foreign entity will still be considered an ODI even if it represents less than 10% of the paid-up equity capital or the investor no longer has control over the foreign business.
Moreover, the term “Overseas Portfolio Investment” (also known as “OPI”) is now defined as “Investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any asset issued by a person residing in India who is not in an IFSC.”
Control- Control has been amended to be defined as the ability to select the majority of the directors, to direct management, or to make policy decisions, whether acting alone or with others, directly or indirectly, including through ownership or management rights, shareholders’ agreements, voting agreements, or any other means granting them 10% or more of the voting power.
‘Indian Party’ with ‘Indian entity- The term “Net-worth” has been defined to include securities premium in accordance with clause (57) of section 2 of the 2013 Companies Act, 2013. Additionally, registered partnership businesses and LLP have been able to calculate their net worth in relation to Overseas Investment with greater clarity.
Round-tripping structures – Persons residing in India are now able to participate in foreign companies that have made direct or indirect investments in India up to two levels of subsidiaries without obtaining RBI authorisation.
Acquisition by a gift- It is now legal for a resident to give foreign stocks to an Indian relative without the RBI’s consent. In accordance with the terms of the Foreign Contribution (Regulation) Act, 2010 (the “FCRA”), a resident individual may accept foreign securities as a gift from a person residing outside of India.
Subsidiary or step-down subsidiary (‘SDS’)- A company that a foreign corporation “controls” is now referred to as a subsidiary or step-down subsidiary (abbreviated “SDS”). Consequently, the investee entities of the foreign business that do not have control or specified voting rights shall not be recognised as subsidiaries or SDSs, and as a result, the reporting obligation is not triggered. When the foreign entity’s primary operation is not in a strategic field, this subsidiary or SDS should likewise have limited liability.
Financial commitment by Indian entity through debt- According to these regulations, financial transfers for loans to foreign entities and/or the issuance of bank guarantees to or on behalf of foreign entities are only permitted if the Indian entity has made ODI and has control over the foreign entity. Furthermore, interest rates should be determined on an arm’s-length basis.
Requirement of No Objection Certificate (‘NOC’): Before making any such financial commitments or undertaking disinvestment, any person residing in India whose account has been classified as non-performing assets, as a wilful defaulter by any bank, or as being under investigation by a financial service regulator or investigative agency must obtain a NOC from the lender bank, regulatory body, or investigative agency.
As a result, it might no longer be necessary to request RBI permission in cases where the firm is being investigated.
Disallowed usage of borrowed funds in start-up -The use of borrowed money is not permitted during the start-up phase. Any ODI made by an Indian business in a foreign start-up must come from internal accruals, not from borrowed money.
Restructuring via the automatic route: An Indian resident who holds ODIs in a foreign corporation that has been losing money for two years is now allowed to restructure that entity’s balance sheet without obtaining RBI consent.
Acceptability of Deferred Payments: Foreign securities can now be purchased and transferred using the Deferred Payment option without the need for RBI permission.
Prohibition on ODI in a foreign organization conducting gambling business – It is made against the law for an Indian resident to conduct ODI in a foreign organisation conducting gambling business.
Transfer involving write off- Transfer with write-offs are made permitted via the automatic method by Indian residents who own equity capital, but only under specified restrictions.
It is made clear that in cases where the transferor must repatriate all outstanding debts prior to disinvestment, this obligation must not apply to debts that don’t result from investments in equity or debt, such as export receivables, etc.
Introduced new channels for Overseas Investment
1. International Financial Services Sector (IFSC)—IFSC is now included in the definition of a foreign entity. Additionally, a foreign entity that is directly or indirectly engaged in financial services activity, other than banking or insurance, and does not meet the net profit condition as required by these rules may accept an ODI from an Indian entity that is not engaged in financial services activity in India and does not meet the net profit condition.
2. Indian entities outside the financial sector are allowed to participate in foreign companies that provide financial services. A foreign entity engaging directly or indirectly in financial services operations, other than banking or insurance, may now accept ODI from an Indian business that is not active in the Indian financial services sector.
Operational Alterations
1. Form FC has taken the place of Form ODI, and Form OPI has been added as a distinct form for anyone residing in India who is not a resident individual participating in OPI
2. Delays in reporting OI-related compliances, such as Annual Performance Reports, will now result in Late Submission Fees (or “LSF”), unless this change is made, an Indian resident is not permitted to transfer or make any additional direct or indirect financial commitments to such foreign entities, whether fund- or non-fund-based.
For up to three years from the date of notification of the OI Requirements, the option of LSF must also be accessible for delayed reporting and submissions made under the prior regulations.
