Foreign Exchange Management

Analysis of the Foreign Exchange Management (Overseas Investment) Rules, 2022

Due to rapid growth in the Indian market, there is a need for Indian companies to be part of the global chain. The Ministry of Finance, on 22nd August 2022, notified the Foreign Exchange Management (Overseas Investment) Rules, 2022 in suppression of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015. The rules have been enacted to provide a regulatory framework for Overseas Investment, to simplify and align it with developing business policies and economic conditions. Overseas Direct Investment and Overseas Investment Portfolio Investment have been simplified. The status of various related transactions under the approval stage has now automatically been converted into the automatic approval route, resulting in the “Ease of Doing Business”

Major Definitions

Overseas Direct Investment

An ‘Overseas Direct Investment’ or ODI is an investment made by acquiring unlisted equity capital of a foreign entity. The investment can be made by subscription to the entity’s memorandum of association. A listed foreign entity can make such an investment provided that the investment is 10% of its paid-up equity capital. 

Overseas Investment

An “Overseas Investment’ or OI is any financial commitment made by a person resident in India. The Foreign Exchange Management (Overseas Investment) Rules further contain that overseas investment may also include overseas portfolio Investment.

Overseas Portfolio Investment

The “Overseas Portfolio Investment” or OPI is any investment in foreign securities or any securities issued by a person resident in India. But the investment is not considered OPI if made in any unlisted debt Instruments.

AD Bank

The ‘AD Bank’ is also known as an Authorised dealer category one bank. The RBI gives these banks licence to deal with the buying and selling foreign securities for Specified purposes. The basic aim of these banks is to provide facilities for foreign exchange for NRI.

Resident Foreign Currency Account

The ‘Resident Foreign Currency Account is a savings account maintained in foreign Currencies. This account is for NRI’s who returned to India and want to hold the funds in foreign currency.

Debt Instruments and Non-Debt Instruments

The Foreign Exchange Management (Overseas Investment) Rules defines debts and non-debt instrument as:

Debt Instruments

The ‘Debt Instruments’ Include:

• Government Bonds
• Corporate Bonds
• Borrowing of Firms through lending
• Depository Receipts whose underlying Securities are Debt Securities

Non-Debt Instruments

 The ‘Non-Debt Instruments’ Include:

• Every investment is made in equity in incorporated Entities.
• Investment of Capital in Limited Liability partnership
• Any instrument of investment as notified by FDI
• Acquisition, sale, or dealing directly in Immovable property
• Ay contribution made to Trusts
• Any depository receipts issued against equity instruments
• Investment in the units of:
  • Alternative Investment Funds
  • Real Estate Investment Trust
  • Infrastructure Investment Trusts
  • Mutual funds and Exchange Traded Funds

Validation of previous Investments

The Foreign Exchange Management (Overseas Investment) Rules do not invalidate the previous investment or financial commitments outside India. All the investments shall be deemed to have been made under these rules.

Eligible Investments and Considerations

The investment shall be made by a person resident in India in a foreign entity provided that the foreign entity is engaged in the bona fide business activity. The central government on an application made by the RBI can modify the ceiling limits to permit financial commitments in the strategic sectors or geographies. The AD bank can apply to the RBI to seek permission to permit any person resident in India to invest or transfer any investment or financial commitment outside India

No Objection Certificate

Any person who is a wilful defaulter whose account is under investigation and the account of the person is considered as an NPA shall need a No objection certificate from the lender bank or investigating agency by making an application.

Manner of fixing Pricing under Foreign Exchange Management (Overseas Investment) Rules

Any issue or transfer of equity capital of a foreign entity from a person who is resident outside India or a person who is resident in India to a person who is resident in India and is eligible for making an investment shall be made according to the price arrived on an Arm’s length basis. An Arm’s length means a transaction between 2 related parties that is conducted as if they were unrelated to avoid any conflict of interest.

Types of Transfer

Any person resident in India may transfer his equity capital under Foreign Exchange Management (Overseas Investment) Rules in the following ways:

• Sale: Transfer by way of sale to a person resident in India or a person resident outside India.
• Merger or demerger, Amalgamation and buyback of shares: May transfer, but approval of the competent authority as per the applicable laws of India or the host country is needed.
• Disinvestment: In the case of disinvestment, the person should not have any dues outstanding from the foreign entity.

Application for Restructuring

Any person resident in India may be allowed the restructuring of the foreign entity provided that the person has invested in the entity. The person can permit the restructuring if he believes the foreign entity is incurring loss by looking at the previous two years’ audited balance sheet. The diminution or reduction in the total value of the outstanding dues of a person in the foreign entity is due to investment in the entity or debt shall be made to him provided that the corresponding original investment is more than USD 10 million. Also, where the amount of diminution in value exceeds 20% of the total outstanding dues, a loss is to be calculated based on the Arm’s Length Basis.

Restriction on ODI

No person is eligible to make an investment by way of ODI in a foreign entity whose principal business is Real estate gambling in any form, dealing with financial products linked to Indian Rupee.

Eligible Transfers

No person is allowed to transfer or acquire any Immovable property outside except with the special permission of the Reserve Bank. There is a general exception to these rules under Foreign Exchange Management (Overseas Investment) Rules, 2022. The property acquired shall be acquired by way of:

• Inheritance
• Purchase of Foreign Exchange Held in Resident Foreign Exchange Currency account.
• Purchase out of remittances given under Liberalised Remittance Scheme
• Jointly with a person resident outside India.
• Out of the income or sale proceeds acquired Overseas.

Business and residential Purposes

The Indian entity is allowed to acquire foreign property for its staff’s business and residential purposes.

Manner of Making ODI by Indian Entity

The Overseas Direct Investment may be made under Foreign Exchange Management (Overseas Investment) Rules in the following ways:

• By subscription or purchase of equity
• By acquisition through bidding or tender procedure
• By acquisition of equity capital by way of rights issue or by allotment of bonus shares;
• By capitalisation,
• By the swap of securities;
• By way of merger or demerger
• By way of amalgamation or any scheme of arrangement

The total financial commitment by way of ODI in the foreign entity shall not exceed 400% of its net worth on the last audited balance sheet date.

Manner of making OPI by an Indian Entity

The Indian Entity may make an overseas portfolio Investment provided that the investment does not exceed 50% of its net worth on the date of its last audited financial balance sheet. A listed company is now eligible to make an investment by way of OPI.

Manner of Making OI by resident

The Overseas Investment may be made by a person resident in India under Foreign Exchange Management (Overseas Investment) Rules by way of:

• By ODI in a foreign operating entity that is not engaged in the business of financial services activity and which does not have any subsidiary or step-down subsidiary
• By way of reinvestment;
• By way of ODI or OPI in the following ways:
• By way of capitalisation
• By swap of securities on account of a merger, demerger, amalgamation or liquidation; (c)
• By acquisition of equity capital through rights issue or allotment of bonus shares;
• By Gift
• By inheritance
• By acquisition of sweat equity shares;
• By acquisition of shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme.

Overseas Investment by a Registered Society or Trust

The ODI can be made by any person registered as a trust and/or registered society engaged in the educational sector, provided that the approval has been taken from the RBI. Any clearing corporation approved by the SEBI can now acquire, hold and transfer foreign securities subject to conditions laid down by SEBI from time to time.

Non- Applicability of Foreign Exchange Management (Overseas Investment) Rules, 2022

These Foreign Exchange Management (Overseas Investment) Rules will not apply to those investments which are made:

• Outside India by a foreign Institution in an IFSC (International Financial Services Centre).
• He makes an individual employed in India and investment out of foreign currency resources.

Conclusion

The Foreign Exchange Management (Overseas Investment) Rules, 2022^[1], are framed in line with the Foreign Exchange Management (Overseas Investment) Regulations, 2022. The Basic aim of framing the rule was to provide the business with numerous opportunities to invest in foreign entities. The rules are framed to provide the concept of transfer and acquisition through which the Indian entity or Resident individual and even the registered society or trust are given broad discretionary investment powers. This will facilitate the ease of doing business by removing various restrictions.

Read our Article: A Detailed Review of Foreign Exchange Management Act 1999