BIS Guidance for Foreign Exchange P...
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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”
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.
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.
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.
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.
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.
The Foreign Exchange Management (Overseas Investment) Rules defines debts and non-debt instrument as:
The ‘Debt Instruments’ Include:
The ‘Non-Debt Instruments’ Include:
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.
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
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.
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.
Any person resident in India may transfer his equity capital under Foreign Exchange Management (Overseas Investment) Rules in the following ways:
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.
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.
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:
The Indian entity is allowed to acquire foreign property for its staff’s business and residential purposes.
The Overseas Direct Investment may be made under Foreign Exchange Management (Overseas Investment) Rules in the following ways:
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.
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.
The Overseas Investment may be made by a person resident in India under Foreign Exchange Management (Overseas Investment) Rules by way of:
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.
These Foreign Exchange Management (Overseas Investment) Rules will not apply to those investments which are made:
The Foreign Exchange Management (Overseas Investment) Rules, 2022, 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