Foreign Exchange Management

Overview of Foreign Exchange Management (Overseas Investment) Regulations 2022

The Foreign Exchange Management (Overseas Investment) Regulations, 2022, was notified by The Reserve Bank of India on 2nd August 2022. Under the new regulations, the equity capital purchased from a foreign entity shall be reckoned as ODI, and the payment for that consideration shall be deferred for a definite period as provided in the agreement between the foreign entity and the Indian entity. Under the new Regulations, the Reserve bank of India has introduced various provisions relating to financial commitment by way of:

1. Modes other than Equity Capital
2. Debt
3. Guarantee
4. Pledge or Charge

1. Financial Commitment

The term “Financial Commitment” shall be construed from the Foreign Exchange Management (Overseas Investment) Rules, 2022. According to Section 2 (f), the term ‘financial Commitment’ includes the amount of investment made by a person resident in India by way of:

• ODI
• Debt (Other than OPI in a foreign entity)
• The entities in which the Overseas Direct Investment is made
• It shall include the non-fund-based facilities extended by such person to or on behalf of such foreign entities.

2. Eligible Modes of Financial Commitment

There are four modes of eligible financial commitments enumerated under the Foreign Exchange Management (Overseas Investment) Regulations, 2022, which are discussed below:

        I. Modes other than Equity Capital

The Indian entity can lend or invest in any debt instrument of a foreign entity. This principle of lending and investing is subject to the following conditions under Foreign Exchange Management (Overseas Investment) Regulations, 2022, provided:

1. The Indian entity is eligible to Make ODI
2. The Indian entity has made Overseas Direct Investment in the Foreign Entity
3. The Indian entity has substantial control over the foreign entity when making such a commitment.

The limits for the financial commitment that could be made to the foreign entity shall adhere to the Foreign Exchange Management (Overseas Investment) Rules, 2022.

      II.  Debt

An Indian entity is allowed to invest or lend in any debt instrument issued by a foreign entity, provided that such loans are under a loan agreement where the rate of interest shall be charged on the Arm’s length basis.

    III. Guarantee

The Indian entity is allowed to acquire financial commitment way of guarantee under Foreign Exchange Management (Overseas Investment) Regulations, 2022. It can be issued to/ on behalf of the foreign entity in which the Indian entity has acquired control through the foreign entity mainly by reason of:

S.no.	Reason	Reason
1	Corporate or Performance guarantee by the Indian entity	The guarantee amount shall be  50% of the financial limits of the Indian entity.
2.	Corporate/Performance guarantee by a group of company	The amount of guarantee shall be calculated independently of the financial limits of the group company.
3.	A promoter group company.	The amount of guarantee shall be calculated independently of the financial limits of the Indian entity.
4.	A guarantee personal given by the resident individual promoter of such an Indian entity	The guarantee amount shall be 100% of the individual limits of the Indian entity.
5.	Any bank Guarantee which is backed by a counter guarantee or ay collateral	As specified by the authorities.

    IV. Pledge or Charge

The Foreign Exchange Management (Overseas Investment) Regulations, 2022 grants An Indian entity that has made an investment in the equity capital by way of ODI in a foreign entity to:

A. Pledge

An Indian entity can pledge the equity capital of the foreign entity in which it has made ODI in favour of:

1. The AD bank
2. A public financial institution in India
3. An overseas lender

The pledge can be made for the purpose of availing the fund-based or non-fund-based facilities for itself or on behalf of the foreign entity in which it has made ODI or its step-down subsidiaries or in favour of debenture trustees registered with SEBI for availing fund-based facilities for itself.

B. Charge

An Indian entity may create a charge by way of:

1. Mortgage
2. Pledge
3. Hypothecation
4. Any other Identical Mode

These charges can be created on the following:

1. Assets held by the Indian Entity in India, Including the assets of its Group Company or associate company, promoter or director.
2. Overseas assets of the foreign entity in which it has made ODI.

3. Mode of Payment under Foreign Exchange Management (Overseas Investment) Regulations, 2022

The payment for Overseas Investment by a person resident in India shall be made by way of:

1. Remittances made through Banking Channels
2. From Funds Held in an Account
3. Swap of Securities
4. Proceeds of ADR( American Depository Receipts) or GDR (Global Depositary Receipts) or stock swap of such receipts
5. External borrowings.

4. Submission of Share Certificates

A resident person making ODI shall need to designate AN Bank. It is made mandatory that all the transactions should flow from the bank. A person who acquires equity capital by investment in a foreign entity shall submit to the AD bank all the share certificates or any other relevant documents as evidence. This process shall be completed within six months from the date of remittance toward the investment. The bank, on the successful submission of the documents, shall allot a UIN or Unique Identification Number.

It is made mandatory Foreign Exchange Management (Overseas Investment) Regulations, 2022 that any amount received on account of:

1. Dues
2. Consideration
3. Disinvestment
4. The proceeds of assets on account of liquidation

Shall be repatriated to India within 90 days of receiving the benefits.

5. Process for reporting Requirements of Overseas Investment

The person resident in India who is interested in making investment or disinvestment or any financial commitments in a foreign entity shall report to the following:

1. Financial Commitment: At the time of making outward remittance or making a financial commitment, whichever is earlier
2. Disinvestment: The disinvestment proceeds shall take place Within 30 days.
3. Restructuring:  The restructuring shall take place within 30 days from the date of such restructuring

The report shall be given within 60 days from the date of such transfer by a resident individual. It is required under Foreign Exchange Management (Overseas Investment) Regulations, 2022 that a person resident in India who is holding equity capital in a foreign entity shall file an Annual Performance Report or APR for such investment. The report shall be given due regard to the procedure and should be submitted to the Department of Statistics and Informative Management, RBI.

6. Fine for Late Submission under Foreign Exchange Management (Overseas Investment) Regulations, 2022

This section had made both individuals and entities responsible liable for the non-submission of a report evidencing the investment. Suppose any person resident in India has failed to report or provide information as regarded. In that case, the person is made liable to file that report or information along with the Late submission fee.

7. Delay in Reporting

The Foreign Exchange Management (Overseas Investment) Regulations, 2022, makes a provision for the delay in the reporting. The person resident in India is not allowed to make further investments, whether fund-based or non-fund based, if there is a delay in reporting until the reporting is regularised.

Conclusion

The Foreign Exchange Management (Overseas Investment) Regulations, 2022 introduced various modes whereby individuals can make financial commitments abroad. The modes introduced by new regulations improve the exchange structure and give a more emphatically view of future foreign financial commitments. A resident individual can make an overseas investment by external borrowings expanding the scope of foreign investment. The new concept of “Late Submission Fee” is introduced to penalise the defaulters if there is a delay in reporting. Hence, the regulation is a comprehensive structure for foreign financial commitments.

Read our Article: Analysis of the Foreign Exchange Management (Overseas Investment) Rules, 2022