Foreign Exchange Management

RBI Regulations on Overseas Investment

On 22^nd August 2022, vide notification no. 400/2022-RB the Reserve Bank of India (RBI)issued the regulations which are known as Foreign Exchange Management (Overseas Investment) Regulations, 2022. This Regulation prescribes the financial commitment which should be made by an Indian entity while making overseas investments under different instruments, acquisition or transfer of deferred payment, obligation of a resident person and the mode of payment, and reporting requirements of overseas investment. If you’re an Indian entity intending to make overseas investments, then you need to know all about this regulation before proceeding to make overseas investments.

Financial Commitment for Making Overseas Investment

Mode of Financial Commitment by Indian Entity	Remarks
Debt instruments issued by foreign entity	The debt should be duly backed by a loan agreement  stating the rate of interest charged at arm’s length basis.
Guarantees issued to or on behalf of foreign entity	The guarantees should be in those Indian entities where the control acquired in foreign entity is via: Corporate or performance guarantee A group of  company of such Indian Entity which is either a holding company or a subsidiary company or a promoter group company. Subject to a condition that the Indian entity should be a body corporate. Personal guarantee by a resident individual promoter of an Indian Entity.Bank guarantee along with a counter guarantee or a collateral by the Indian entity or its group company issued by a bank in India.
Pledging equity capital of foreign entity	Overseas Direct Investment (ODI) can be made by an Indian entity in equity capital in a foreign entity pledging equity capital of foreign entity held either directly by the Indian entity in a foreign entity or indirectly in step down subsidiary. It shall be done as per the condition prescribed in the regulation.
Creating charge by way of mortgage, pledge, hypothecation or any other identical mode	It can be created on: Assets in India; orAssets outside India as specified in the Regulations. It shall be done as per the condition prescribed in the regulation.
Any other equity capital	If an Indian Entity lends or invests in any type of a debt instrument issued by a foreign entity or extends a commitment which is based of non fund, to or on behalf of a foreign entity including an overseas subsidiary of the Indian entity then the following conditions have to be complied: The Indian entity should be eligible to make ODI;The Indian entity has made ODI in foreign entity;The Indian entity has acquired control over the foreign company while making the financial commitment.

In case of Acquisition or transfer by way of deferred payment in case of Overseas Investment

When a resident Indian acquires equity capital by subscribing to an issue or by purchasing from a non-resident Indian or where the non-resident acquires equity capital in India by purchasing from a resident Indian and where the equity capital is considered as ODI, and the payment of the amount of consideration for the equity capital so acquired will defer the prescribed period from the date of agreement and subject to the conditions as provided below:

1.  The foreign securities are equivalent to the amount of total consideration is issued or transferred by the seller to the buyer;
2. The full consideration paid is in compliance with applicable pricing guidelines;

The above two conditions are subject to an exception that the deferred part of the consideration in an acquisition of equity capital of a foreign entity by a resident Indian is treated as on-fund based commitment. Furthermore, the buyer can be indemnified by the seller to the extent and subject to terms and conditions as is mutually agreed and incorporated in the form of an agreement. However, the agreement should be in compliance with the provisions of the rules and regulations formulates thereunder.

Mode of Payment for Overseas Investment

A resident Indian making Overseas Investment can make payment in the following manner:

1. Remittance through banking channels;
2. Funds held in an account maintained as per the provisions of the Act;
3. Swap of securities;
4. Proceeds of American depository Receipts or Global Depository Receipts or Stock Swap of such receipts or external commercial borrowings (ECB) or financial commitment in the form of a debt by an Indian Entity.

Obligations of a Resident Indian for Making Overseas Investment

1. If an ODI is made by the resident Indian, then he shall submit bank certificate or any other relevant document as an evidence of the investment in the foreign entity to the AD Bank within 6 (six) months from the date when the remittance come into effect or the date on which the person is realized/obtained or the date on which the amount due was allowed to be realized/obtained.
2. A resident Indian willing to make ODI, has to acquire a Unique Identification Number (UIN) from the Reserve Bank of India (RBI)^[1]via a designated AD Bank from the foreign entity in which the ODI will be made before outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier.
3. A resident Indian making ODI shall route all transactions relating to a specific UIN through a designated AD Bank. However, where more than one resident India are making financial commitment in the same foreign entity, then all such persons are required to route all transactions to that UIN through AD bank designated for that UIN.
4. A resident Indian having ODI in a foreign entity is obligated to capitalize/obtain and repatriate all dues which are receivable from the foreign entity with respect to investments in foreign entityto India, wherever applicable. The amount of consideration on account of transfer or disinvestment of such ODI and net realizable value of assets on account o liquidation of foreign entity should be received within 90 (ninety) days from the from the date on which the receivable falls due or the date of transfer or disinvestment or the date of actual distribution of assets made by the official liquidator.
5. A resident Indian eligible to make ODI can make remittance towards the earnest money deposit or obtain a bid bond guarantee from the AD bank for participation in the bidding or tender procedure for the acquisition of foreign entity. However, in cases of open-ended bid bond guarantee, the same shall be converted into a close-ended guarantee, This should be done not later than three from the date of award of the contract.

Reporting Requirement for Overseas Investment

1. All reporting by resident Indians shall be made through designated AD Bank in accordance with the regulation and format provided by the RBI.
2. A resident Indian making an ODI or financial commitment or undertaking disinvestment in a foreign entity shall report the following:

Report requirement	Reporting time
Financial commitment whether reckoned towards financial commitment or not	At the time of sending outward remittance or making financial commitment, whichever is earlier.
Disinvestment	Within 30 (thirty) days of receipt of disinvestment proceeds.
Restructuring	Within 30 (thirty) days of date of restructuring.

• Report on investment or transfer of investment- It shall be done by a resident Indian other than the resident Indian making Overseas Portfolio Investment (OPI) or transferring such OPI by way of sale shall be reported within 60 (sixty) days from the end of half year in which the investment or transfer is made as of September or March end. In case of OPI, reporting shall be done by the Indian office or branch office of an overseas entity or Indian subsidiary of an overseas entity or the Indian entity in which the overseas entity has either direct or indirect equity holding where the resident individual is an employee or director.
• Annual Performance Report (APR)-APR shall be filed by the resident Indian acquiring equity capital. This report shall be filed with respect to each foreign entity. APR It is filed on the basis of audited financial statements every year by 31^st December. Where the accounting year of such foreign entity ends on 31^st December, then APR should be filed by 31^st December of the next year. No APR is required to be filed in following cases:
• When a resident Indian holding less than 10% of equity capital without any control in the foreign entity and there is no other financial commitment other than by way of equity capital; or
• When a foreign entity is under liquidation.

APR may also be filed on the basis of unaudited financial statements where the resident Indian does not have control in the foreign entity and laws of the host country do not provide for mandatory audit of books of accounts. In such a case, APR should be filed by statutory auditor of the Indian entity or by a CA where statutory audit is inapplicable.

Delay in reporting

A resident Indian who fails to submit evidence of investment on time or fails to make any filing within the specified time can file it after the expiry of due date along with Late Submission Fee within a period as may be advised and at a rate and manner as may be specified by RBI from time to time. Late filing can be done only within a maximum period of 3 (three) years from the due date of filing.

Restriction on financial commitment or transfer

If a resident India has made a financial commitment in a foreign entity as per the Act or rules framed thereunder, then he shall not make any further financial commitment towards foreign entity or transfer such investment till the time any delay in reporting is regularized.

Conclusion

In consequence, it can be said that the Foreign Exchange Management (Overseas Investment) Regulation, 2022 prescribes the mode in which overseas investment is to be made, the obligations of the resident Indian making overseas investment, the mode of payment and the reporting requirements. This will bring clarity while making overseas investments and will ensure efficiency in reporting.

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