[Key Highlights] Foreign Exchange Management (Overseas Investment) Regulations, 2022

The RBI vide Notification No. FEMA 400/2022-RB, Dated 22.08.2022 has notified the Foreign Exchange Management (Overseas Investment) Regulations, 2022. Under the new norms, the RBI has prescribed various modes of financial commitment by Indian entities by way of:

(a) modes other than equity capital
(b) debt
(c) guarantee
(d) Pledge or charge.

The norms also provide that Acquisition or transfer of equity by way of deferred payment would be reckoned as ODI. Also provides obligations of a person resident in India, and reporting requirements for ODI.

The key highlights of the Foreign Exchange Management (Overseas Investment) Regulations, 2022 are discussed in detail herein below –

1. 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 extant 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.

2. 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 step-down 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.

3. Recognition of acquisition or transfer by way of deferred payment as ODI

Where a person resident in India acquires equity capital by way of subscription to an issue or by way of purchase from a person resident outside India or where a person resident outside India acquires equity capital by way of purchase from a person resident in India, and where such equity capital is reckoned as ODI, the payment of consideration for the equity capital acquired can be deferred for a definite period of time on the following conditions –

• • the foreign securities equivalent to the amount of total consideration shall be transferred or issued by the seller to the buyer;
  • the full consideration finally paid shall be compliant with the applicable pricing guidelines.

4. Various obligations of 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.

5. Provides reporting requirements for ODI by a PRI

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 –

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.

6. Introduction of the concept of ‘Late Submission Fees’

Where a person resident in India responsible for submitting evidence or making filings related to ODI fails to make such submissions or filings, can make submissions or filings along with the Late Submission Fee in the manner as RBI may direct. Further, such a facility can be availed within a maximum period of 3 years from the date of publication of these regulations in the Official Gazette.
Under the extant norms, no such facility was provided in the regulations.

7. Restrictions on further financial commitment or transfer by a PRI

A person resident in India is not allowed to make any further financial commitment towards a foreign entity or transfer any investment till any delay in reporting is regularised.