Govt. notifies Regulations specific to overseas investment and transfer/acquisition of immovable property outside India
RBI vide Notification No. No. FEMA 400/2022-RB, Dated 22.08.2022 has notified the Foreign Exchange Management (Overseas Investment) Regulations, 2022
In line with the amendment in the Foreign Exchange Management Act 2015, Outward Investments Rules have been framed by the Government of India in consultation with the Reserve Bank. Presently, the overseas investment by a person resident in India is governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015. Extant regulations pertaining to Overseas Investments and Acquisition and Transfer of Immovable Property Outside India have been subsumed within these rules and regulations. In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is need of Indian corporates to be part of global value chain. The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics. Clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment related transactions that were earlier under approval route are now under automatic route, significantly enhancing “Ease of Doing Business”.
The key highlights of the Foreign Exchange Management (Overseas Investment) Regulations, 2022 are as follows;
1. Overseas direct investment would henceforth mean investments:
* By way of acquisition of unlisted equity capital of a foreign entity.
* Subscription as a part of the memorandum of association of a foreign entity.
* Investment in 10% or more of the paid-up equity capital of a listed foreign entity.
* Even in cases where investment is less than 10% of the paid-up equity capital of a listed foreign entity but there is control over the board of listed entity
2. Modification in the definition of the term ‘Financial Commitment’
As per the new regulations, the term ‘financial commitment’ shall have the meaning as assigned in the FEM (Overseas Investment) Rules, 2022. As per rule 2(f), the term ‘financial commitment’ means the aggregate amount of investment made by a person resident in India –
(a) by way of Overseas Direct Investment,
(b) debt other than Overseas Portfolio Investment in a foreign entity or entities in which the Overseas Direct Investment is made and shall
(c) include the non-fund-based facilities extended by such person to or on behalf of such foreign entity or entities
Under the new regulations, the term ‘Financial commitment’ means the amount of direct investment by way of contribution to equity and loan and 50% of the amount of guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary
3. Continuity of certain investments:
Any investment or financial commitment outside India made in accordance with the Act or the rules or regulations made thereunder and held as on the date of publication of these rules in the Official Gazette, shall be deemed to have been made under these rules and the Foreign Exchange Management (Overseas Investment) Regulations, 2022.
4. No Objection Certificate required in cases of defaults in repayment of loans to banks:
Any person resident in India who,–
(i) has an account appearing as a non-performing asset; or
(ii) is classified as a wilful defaulter by any bank; or
(III) is under investigation by a financial service regulator or by investigative agencies in India, namely, the Central Bureau of Investigation or Directorate of Enforcement or Serious Frauds Investigation Office, shall, before making any financial commitment or undertaking disinvestment under these rules or the Foreign Exchange Management (Overseas Investment) Regulations, 2022, obtain a No Objection Certificate from the lender bank or regulatory body or investigative agency by making an application in writing to such bank or regulatory body or investigative agency concerned:
5. Prescribed various modes of financial commitment by the Indian Entity
The RBI has prescribed various modes of financial commitment by Indian Entities by way of –
(a) Financial Commitment by modes other than equity capital
The Indian entity can lend or make an investment in debt instruments issued by a foreign entity or extend non-fund based commitment to or on behalf of a foreign entity including overseas step-down subsidiaries within the financial commitment limit i.e. 400% of net worth as on the date of the last audited balance sheet and subject to the following conditions –
- The Indian entity is eligible to make ODI
- The Indian entity has made ODI in the foreign entity
- The Indian entity has acquired control in such a foreign entity at the time of making such a financial commitment.
(b) Financial Commitment by way of debt,
An Indian entity can lend or invest in any debt instruments issued by a foreign entity on the condition that such loans are duly backed by a loan agreement where the rate of interest shall be charged on an arm’s length basis.
(c)Financial Commitment by way of guarantee
The following guarantees can be issued to or on behalf of a foreign entity or a stepdown subsidiary in which an Indian entity has acquired control through a foreign entity –
- Corporate or performance guarantee by such Indian entity;
- corporate or performance guarantee by a group company of such Indian entity in India, being a holding company (which holds at least 51 per cent. stake in the Indian entity) or a subsidiary company (in which the Indian entity holds at least 51 per cent. stake) or a promoter group company, which is a body corporate;
- personal guarantee by the resident individual promoter of such an Indian entity
- bank guarantee, which is backed by a counter-guarantee or collateral by the Indian entity or its group company as above, and issued, by a bank in India.
(d) Financial Commitment by way of pledge or charge
The Indian entity which has made ODI by way of investment in equity capital in a foreign company can –
- Pledge the equity capital of the foreign entity in which it has made ODI or of its step down subsidiary outside India, held directly by the Indian entity in a foreign entity and indirectly in step down subsidiary, in favour of an AD bank or a public financial institution in India.
- Create charge by way of mortgage, pledge, hypothecation or any other mode on its assets in India including the assets of its Group Company or associate company, promoter or director, in favour of an AD bank or a public financial institution in India.
6. Compliances to be done by a person resident in India:
A person resident in India acquiring equity capital in a foreign entity needs to fulfil the following obligations –
(a) Submit to AD bank share certificates or any other document as evidence for making ODI within 6 months from the date of effecting the remittance.
(b) Obtain a Unique Identification Number or “UIN” from the Reserve Bank for the foreign entity in which the ODI is intended to be made before sending outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier.
(c) Designate AD bank and route all transactions relating to a particular UIN through such AD
(d) Repatriate to India all dues receivable from a foreign entity within 90 days of its falling due or from the date of transfer or disinvestment
(e) remittance towards earnest money deposit or obtain a bid bond guarantee from an AD bank for participation in bidding or tender procedure for the acquisition of a foreign entity
Under the extant norms, only obligations of the Indian Party were provided in the regulations.
7. Reporting Requirements:
A person resident in India who has made an ODI or financial commitment or disinvestment in a foreign entity is required to report the following
- Financial Committment – At the time of sending outward remittance or making a financial commitment whichever is earlier
- Disinvestment – Within 30 days of receipt of disinvestment proceeds
- Restructuring – Within 30 days from the date of restructuring
A person resident in India acquiring equity capital in a foreign entity which is reckoned as ODI, is required to submit an Annual Performance Report (APR) with respect to each foreign entity every year by 31st December and where the accounting year of such foreign entity ends on 31st December, the APR shall be submitted by 31st December of the next year. Further, in case more than one person resident in India have made ODI in the same foreign entity, the person holding the highest stake in the foreign entity shall be required to submit APR and in case of holdings being equal, APR can be filed jointly by such persons.
8. Restructuring in value of investment by Indian entity prusuant to reporting of loss by Foreign Entity:
A person resident in India who has made ODI in a foreign entity may permit restructuring of the balance sheet by such foreign entity, which has been incurring losses for the previous two years as evidenced by its last audited balance sheets, subject to ensuring compliance with reporting, documentation requirements and subject to the diminution in the total value of the outstanding dues towards such person resident in India on account of investment in equity and debt, after such restructuring not exceeding the proportionate amount of the accumulated losses.
9. Investment in foreign entity being Start-up:
Any ODI in start-ups recognised under the laws of the host country or host jurisdiction as the case may be, shall be made by an Indian entity only from the internal accruals whether from the Indian entity or group or associate companies in India and in case of resident individuals, from own funds of such an individual.
10 Restriction on acquisition or transfer of immovable property outside India:
no person resident in India shall acquire or transfer any immovable property situated outside India without general or special permission of the Reserve Bank. Provided that nothing contained in this rule shall apply to a property–
(i) held by a person resident in India who is a national of a foreign State;
(ii) acquired by a person resident in India on or before the 8th day of July, 1947 and continued to be
held by such person with the permission of the Reserve Bank;
(iii) acquired by a person resident in India on a lease not exceeding five years.
a person resident in India may acquire immovable property outside India by way of inheritance or gift or purchase from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition;
a person resident in India may acquire immovable property outside India from a person resident outside India–
(a) by way of inheritance;
(b) by way of purchase out of foreign exchange held in RFC account;
(c) by way of purchase out of the remittances sent under the Liberalised Remittance Scheme instituted by the Reserve Bank:
Provided that such remittances under the Liberalised Remittance Scheme may be consolidated in respect of relatives if such relatives, being persons resident in India, comply with the terms and conditions of the Scheme;
(d) jointly with a relative who is a person resident outside India;
(e) out of the income or sale proceeds of the assets, other than ODI, acquired overseas under the provisions of the Act;
an Indian entity having an overseas office may acquire immovable property outside India for the business and residential purposes of its staff, as per the directions issued by the Reserve Bank from time to time;
a person resident in India who has acquired any immovable property outside India in accordance with the foreign exchange provisions in force at the time of such acquisition may–
(a) transfer such property by way of gift to a person resident in India who is eligible to acquire such property under these rules or by way of sale;
(b) create a charge on such property in accordance with the Act or the rules or regulations made thereunder or directions issued by the Reserve Bank from time to time.
Limitation: The purpose of this article is for knowledge sharing purpose. Views expressed in this note are personal views of the author. The same should not be construed as professional advise