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

The Government vide Notification no. G.S.R 646(E), dated 22-08-2022 has notified the Foreign Exchange Management (Overseas Investment) Rules, 2022. The new norms aim to simplify the existing framework for overseas investment by a person resident in India to cover wider economic activity and significantly reduce the need for seeking specific approvals. The Foreign Exchange Management (Overseas Investment) Rules, 2022 will subsume extant regulations pertaining to Overseas Investments and Acquisition and Transfer of Immovable Property outside India Regulations, 2015. The key highlights are discussed in detail herein below:-

1. Non-applicability of overseas direct investment norms to specified investments/transfers

The Foreign Exchange Management (Overseas Investment) Regulations, 2022 shall not apply to:

(a) any investment made outside India by a financial institution in an IFSC;

(b) acquisition or transfer of any investment outside India made:

• • • out of Resident Foreign Currency Account; or
    • out of foreign currency resources held outside India by a person who is employed in India for a specific duration irrespective of length thereof or for a specific job or assignment, duration of which does not exceed three years; or
    • by a person when he was resident outside India or inherited from a person resident outside India

2. Restrictions and Prohibitions on activities under ‘Overseas Investment norms’

New norms provide that a person resident in India shall make or transfer any investment or financial commitment outside India only in accordance with the Act, rules, regulations, or directions made thereunder.

It further provides that any investment made outside India by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or through a step-down subsidiary or the special-purpose vehicle, subject to the limits and the conditions laid down in these rules and the said regulations

2.1 Prohibited Entities that are engaged in specified activities

A person resident in India are prohibited from making any investment in a foreign entity engaged in:

(a) Real estate activity

(b) Gambling in any form

(c) Dealing in financial products linked to the Indian rupee without specific approval of the Reserve Bank.

2.2 ODI in Starts-ups recognized under laws of host country to be made only from internal accruals

Indian entities can’t use borrowed funds to make an ODI in the start-ups. The new norms specify that any ‘Overseas Direct Investment’ in start-ups recognized 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.

2.3 No financial commitment is allowed in a foreign entity if it resulting in having two layers of subsidiaries

No person resident in India shall make a financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries

3. Stringent valuation norms proposed for overseas direct investments

The new norms permit restructuring of the balance sheet by a foreign entity. Under new norms, a person resident in India who has made ODI in a foreign entity can permit restructuring of the balance sheet by a foreign entity, which has been incurring losses for the previous two years as per its last audited balance sheets.
However, restructuring can be permitted by a foreign entity only after ensuring compliance with reporting, documentation requirements, and diminution in the total value of the outstanding dues towards a person resident in India on account of investment in equity and debt.

The diminution in value is required to be duly certified on an arm’s length basis by a registered valuer:

(a) where the amount of original investment is more than USD 10 million or
(b) where the amount of such diminution exceeds 20% of the total value of the outstanding dues towards the Indian entity or investor,

It must be noted that the certificate dated not more than 6 months shall be submitted to the AD bank.

4. NPA account holder must obtain NOC from lender bank before making financial commitments

Under new norms, a person resident India who has account appearing as NPA or is classified as willful defaulter by any bank or under investigation by CBI/ED/SFIO shall obtain NOC from lender bank before making any financial commitment or undertaking disinvestment.

In case if lender bank or regulatory body or investigative agency concerned fails to furnish the certificate within sixty days from the date of receipt of such application, it may be presumed that there was no objection to the proposed transaction.

5. Pricing for issue/transfer of equity of foreign entity shall be at Arm’s length

The norms provide that issue or transfer of equity capital of a foreign entity from a person resident outside India or a person resident in India to a person resident in India who is eligible to make such investment or from a person resident in India to a person resident outside India shall be subject to a price arrived on an arm’s length basis. The norms obligate AD Bank to ensure compliance with Arms’ length pricing before facilitating such transactions.

6. Govt. lists out debt and non-debt instruments

As per Section 6(6) of the Act, the term ‘debt instruments’ for the purpose of capital account means such instruments as may be determined by the Central Government in consultation with the Reserve Bank. Earlier, the list of debt and non-debt instrument was not available. Now the Government has listed out debt and non-debt instruments as under:

(a) Debt instruments:

• • • Government bonds;
    • corporate bonds;
    • all tranches of securitization structure that are not equity tranche;
    • borrowings by firms through loans; and
    • depository receipts whose underlying securities are debt securities;

(b) Non-Debt instruments:

• • • all investments in equity in incorporated entities (public, private, listed and unlisted);
    • capital participation in LLPs;
    • all instruments of investment as recognised in the FDI policy;
    • investment in units of AIF and REITs and InVITs;
    • investment in units of mutual funds and Exchange-Traded Fund which invest more than 50 % in equity;
    • the junior-most layer (i.e. equity tranche) of securitization structure;
    • acquisition, sale or dealing directly in immovable property;
    • contribution to trusts; and
    • depository receipts issued against equity instruments;

7. Continuity of certain investments for a smooth transition to new norms

In order to have a smooth transition from the old regime to the new overseas investment norms, 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.

7.1 Treatment of Rights issue and bonus issue for investors who hold equity in a foreign entity

Similarly, any person resident in India who has acquired and continues to hold equity capital of any foreign entity may invest in equity such entity as right issue and he may be granted bonus shares in compliance with the terms and conditions laid out in new norms.

8. Transfer or liquidation of overseas Investment

A person resident in India may transfer equity capital by way of sale to a person resident in India, who is eligible to make such investment under these rules, or to a person resident outside India

In case the transfer is on account of merger, amalgamation, or demerger or on account of buyback of foreign securities, such transfer or liquidation in case of liquidation of the foreign entity shall have the approval of the competent authority as per the applicable laws in India or the laws of the host country or host jurisdiction, as the case may be.

8.1 Conditions for Disinvestment

If disinvestment by a person resident in India relates to ODI then, the transferor shall not have dues outstanding for the receipt from the foreign entity as an investor in equity capital or debt

In case of any disinvestment, the transferor must have stayed invested for at least one year from the date of making ODI.

However, the above conditions shall not be applicable in case of a merger, demerger or amalgamation between two or more foreign entities that are wholly-owned, directly or indirectly, by the Indian entity or where there is no change or dilution in aggregate equity holding of the Indian entity in the merged or demerged or amalgamated entity.

9. Introduction of the new definitions

9.1 Overseas Investment

“Overseas Investment” or “OI” means financial commitment and Overseas Portfolio Investment by a person resident in India;

9.2 Overseas Direct Investment

“Overseas Direct Investment” or “ODI” means investment by way of acquisition of unlisted equity capital of a foreign entity, or subscription as a part of the memorandum of association of a foreign entity, or investment in 10%, or more of the paid-up equity capital of a listed foreign entity or investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity;

9.3 Overseas Portfolio Investment

“Overseas Portfolio Investment” or “OPI” means investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.