The government on Monday introduced a new set of rules for domestic entities, including corporations and large family offices and start-ups, opting for the overseas direct investment (ODI) route, which could impact considerable impact on their acquisition decisions.
The new rules, which came into force on Monday, made an explicit distinction between ODI (all investments in unlisted foreign entities and more than 10% in listed foreign entities) and OPI (investment by listed companies in listed foreign securities). ). The rules state that all ODI transactions must take place at fair value.
Also, round-trip structures now do not require the approval of the Reserve Bank of India, if the structure involves less than two tiers of subsidiaries.
The rules also clarified that the gift of foreign securities is only permitted between relatives. Previously, anyone could donate titles to Indians.
“Except for banking and insurance companies, non-bank financial companies and government entities, any domestic entity may not financially commit to any foreign entity that has invested or is investing in India, at the time of making such commitment financial institution or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries”, according to the new regulations notified by the Ministry of Finance.
“Any ODI in start-ups, recognized under the laws of the host country, could only be carried out by an Indian entity from internal charges, whether from the Indian entity or group or from the associated companies in India and, in the case of resident individuals, such individual’s own funds,” said Sandeep Jhunjhunwala, tax partner at Nangia Andersen LP.
The new rules also aim to strengthen reporting requirements for domestic entities opting for the ODI route, in which domestic companies will have to submit a host of evidence of investments within specified deadlines. Failing this, companies will pay late submission fees as prescribed by the Reserve Bank of India. The central bank should issue a detailed circular on this subject.
The ODI route is for non-individual entities such as corporations and trusts. Individuals use a different channel to send money out, called the Liberalized Remittance Program (LRS).
The Foreign Investment Rules, notified under the Foreign Exchange Management Act (FEMA), will encompass all existing rules relating to overseas investments as well as those relating to the acquisition and transfer of property real estate outside India. The Reserve Bank of India will administer the new regulations, the finance ministry said.
“The revised regulatory framework for overseas investment provides for a simplification of the existing framework for overseas investment and has been aligned with current trade and economic dynamics,” the ministry said.
The finance ministry said the new rules will bring clarity on overseas investments and related transactions, which were previously under the central bank’s approval path. Now all of these will be under automatic routing, which will greatly improve the ease of doing business, he noted.
The RBI had previously released draft Foreign Exchange Management (Non-Debt Instruments – Overseas Investment) Rules, 2021 for public comment.