Reserve Bank of India (RBI) has issued directions on overseas investment.
What is Overseas Direct Investment (ODI)?
Overseas Direct Investment (ODI) means –
- Acquisition of any unlisted equity capital or 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
- Investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity
An investment in a foreign entity, once classified as ODI, shall continue to be treated as ODI even if such investment falls below 10% of the paid-up equity capital or the investor loses control in the foreign entity.
What is Overseas Portfolio Investment (OPI)?
Overseas Portfolio Investment (OPI) means investment, other than ODI, in foreign securities.
- OPI shall not be made in –
- any unlisted debt instruments
- any security which is issued by a person resident in India who is not in an IFSC
- any derivatives unless otherwise permitted by RBI
- any commodities including Bullion Depository Receipts (BDRs)
- OPI by a person resident in India in the equity capital of a listed foreign entity, even after its delisting, shall continue to be treated as OPI, however, any further investment after delisting shall be made as ODI.
- A listed Indian company may make OPI, including by way of reinvestment.
- An unlisted Indian entity may make OPI.
- The investment (including sponsor contribution) in units or any other instrument issued by an investment fund overseas, duly regulated by the financial sector regulator in the host jurisdiction, shall be treated as OPI. Accordingly, in jurisdictions other than IFSCs, listed Indian companies and resident individuals may make such investment. Whereas in IFSCs, in addition to listed Indian companies and resident individuals, an unlisted Indian entity also may make such OPI.
- Resident individuals may make OPI within the overall limit for Liberalised Remittance Scheme (LRS). Further, shares or interest acquired by the resident individuals by way of sweat equity shares or minimum qualification shares or under Employee Stock Ownership Plan (ESOP) / Employee Benefits Scheme up to 10% of the paid up capital / stock, whether listed or unlisted, of the foreign entity and without control shall also qualify as OPI.
- Any investment made overseas in securities as stipulated by SEBI by Mutual Funds (MFs), Venture Capital Funds (VCFs) and Alternative Investment Funds (AIFs) registered with SEBI shall be considered as OPI.
What is financial commitment?
Financial commitment by a person resident in India means the aggregate amount of investment by way of ODI, debt other than OPI and non-fund based facility extended by it to all foreign entities.
What are the guidelines for overseas investment?
- The applications for overseas investment / financial commitment in Pakistan / other jurisdiction as may be advised by the Central Government or in strategic sectors / specific geographies shall be forwarded by the AD banks from their constituents to RBI for onward submission to the Central Government.
- Financial commitment by an Indian entity, exceeding USD 1 billion (or its equivalent) in a financial year shall require prior approval of RBI even when the total financial commitment of the Indian entity is within the eligible limit under the automatic route.
- A person resident in India acquiring equity capital in a foreign entity, which is reckoned as ODI, shall within 6 months, submit the evidence of investment to the AD bank or repatriate the funds remitted overseas.
- A person resident in India, who has acquired and continues to hold equity capital in a foreign entity may acquire equity capital through exercise of rights or by way of bonus shares.
- Any ODI in startups shall not be made out of funds borrowed from others.
- An Indian entity may open and maintain Foreign Currency Account (FCA) abroad for the purpose of making ODI.
- Acquisition of foreign securities by way of inheritance or gift shall not be reckoned towards the LRS limit.
- AD bank shall not facilitate any outward remittance / further financial commitment by a person resident in India towards a foreign entity until any delay in reporting is regularised.
- AD bank may allow remittance towards pre-incorporation expenses up USD 100,000 per foreign entity. Such remittances made by a resident individual shall be reckoned towards their LRS limit.
- Any remittance towards a foreign entity shall be facilitated by AD bank only after obtaining the necessary UIN for such entity. The allotment of UIN does not constitute an approval from RBI for the investment made / to be made in the foreign entity but only signifies taking on record of the investment for maintaining the database.
- Any person resident in India having an account appearing as a Non-Performing Asset (NPA) or is classified as wilful defaulter or is under investigation by a financial sector regulator / investigative agency shall obtain No Objection Certificate (NOC) from the lender bank / regulatory body / investigative agency concerned, before making financial commitment or undertaking disinvestment.
- Where an Indian entity has already issued a guarantee before an investigation has begun or account is classified as NPA / wilful defaulter and subsequently is required to honour such contractual obligation, such remittance due to the invocation will not constitute fresh financial commitment and hence NOC shall not be required.
What are the guidelines on acquisition of a foreign entity through bidding or tender procedure?
- AD banks may, on being approached by an eligible person resident in India, allow remittance towards Earnest Money Deposit (EMD) or may issue bid bond guarantee on their behalf for participation in bidding or tender procedure for acquisition of a foreign entity.
- On winning the bid, AD banks may facilitate further remittances to the foreign entity so acquired.
- AD banks, while permitting remittance towards EMD should advise the Indian entity / investor that in case they are not successful in the bid, they shall repatriate the amount remitted.
- In cases where such a person resident in India, after being successful in the bid / tender decides not to proceed further with the investment, AD banks shall ensure the bona fides of transaction while permitting the invocation of bid-bond guarantee or forfeiture of EMD.
What are the guidelines on mode of payment for making overseas investment?
- Overseas investment by way of cash is not permitted.
- No remittance shall be made by any Indian entity to its branch / office outside India for making any overseas investment.
- A person resident in India shall not make any payment on behalf of any foreign entity other than by way of financial commitment.
- Any investment / financial commitment in Nepal and Bhutan shall be done in a manner as provided in Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016. All dues receivable on investments (or financial commitment) made in freely convertible currencies, as well as their sale / winding up proceeds shall be repatriated to India in freely convertible currencies only.
What are the guidelines on reporting?
- In case a person resident in India has made a delay in filing / submitting the requisite form / return / document, such person may file / submit the requisite form / return / document, etc. and pay the Late Submission Fee (LSF) through the designated AD bank.
- The LSF shall be calculated as per the following matrix –
| Type of Reporting delays | LSF (INR) |
| Form ODI Part-II / APR, FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting | 7500 |
| Form ODI-Part I, Form ODI-Part III, Form FC, or any other return which captures flows or returns which capture reporting of non-fund based transactions or any other transactional reporting | [7500 + (0.025% × A × n)] |
| “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points. “A” is the amount involved in the delayed reporting. | |
- LSF amount is per return.
- Maximum LSF amount will be limited to 100% of ‘A’ and will be rounded upwards to the nearest hundred.
- If LSF is not paid within 30 days of issue of advice for payment of LSF, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of LSF.
- The option of LSF shall be available up to 3 years from the due date of reporting / submission. The option of LSF shall also be available for delayed reporting / submissions under earlier corresponding regulations, up to 3 years from the date of notification of Overseas Investment (OI) Regulations.
- In case a person resident in India responsible for submitting the evidence of investment or filing any forms / returns / reports, etc., neither makes such submission / filing within the specified time nor makes such submission / filing along with LSF, shall be liable for penal action under the provisions of FEMA, 1999.
What are the guidelines on financial commitment by an Indian entity?
- An Indian entity, within the overall limit, may make financial commitment by way of ODI, financial commitment by way of debt and non-fund based financial commitment.
- An Indian entity shall not lend directly to its overseas step-down subsidiary (SDS).
- A resident individual shall not make financial commitment by way of debt.
- No prior approval from RBI shall be needed for remitting the funds from India on account of invocation of a performance guarantee.
- Any guarantee, to the extent of the amount invoked, shall cease to be a part of the non-fund based financial commitment but will be considered as financial commitment by way of debt.
What are the guidelines on overseas investment by resident individuals?
- Resident individuals (single or in association with another resident individual or with an Indian entity) are permitted to make ODI.
- Where swap of securities results in acquisition of any equity capital which is not in conformity with the OI Rules / Regulations, e.g., ODI in foreign entity engaged in financial services activity, foreign entity having a subsidiary / SDS, etc., such equity capital must be disinvested within 6 months from the date of such acquisition.
- Resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India.
- AD banks may allow remittances, towards acquisition of the shares / interest in an overseas entity under the scheme offered directly by the issuing entity or indirectly through a Special Purpose Vehicle (SPV) / SDS. Where the investment qualifies as OPI, the necessary reporting in Form OPI shall be done by the employer concerned. Where such investment qualifies as ODI, the resident individual concerned shall report the transaction in Form FC.
- Foreign entities are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided the shares are being repurchased in terms of the initial offer document.
What are the guidelines on overseas investment by a person resident in India, other than an Indian entity or a resident individual?
- MFs and VCFs / AIFs registered with SEBI may invest overseas in securities as stipulated by SEBI up to USD 7 billion and USD 1.5 billion, respectively.
- A limited number of qualified MFs are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds, as may be permitted by SEBI.
- AD bank, including its overseas branch, may acquire or transfer foreign securities in terms of host country regulations / laws, in the normal course of its banking business. OI Rules / Regulations shall not apply to such acquisition or transfer.
- A bank in India, may acquire the shares of Society for Worldwide Interbank Financial Telecommunication (SWIFT) as per the by-laws of SWIFT, provided the bank has been permitted by RBI for admission to the ‘SWIFT User’s Group in India’ as a member.
- Any overseas investment by the sole proprietorship or unregistered partnership firms may be made by the proprietor or individual partners concerned within their limit available under the LRS. If the proposed investment is in strategic sector, any application for making overseas investment in excess of the LRS limit may be made under the government approval route.
- Overseas investment by registered trust / society may be made under the approval route.
What are the guidelines on overseas investment in IFSC by a person resident in India?
- The restriction of making ODI only in an operating foreign entity or not making ODI in a foreign entity engaged in financial services activity by resident individuals, shall not apply to an investment made in IFSC. Such investment, however, shall not be made in any foreign entity engaged in banking or insurance.
- Such foreign entity in IFSC may have subsidiary / SDS in IFSC. It may also have subsidiary / SDS outside IFSC where the resident individual does not have control in the foreign entity.
- Resident individual who has made ODI without control shall not acquire control in a foreign entity that subsequently acquires or sets-up a subsidiary / SDS outside India.
What are the guidelines on acquisition or transfer of immovable property outside India?
AD bank may allow an Indian entity having an overseas office to acquire immovable property outside India for the business and residential purposes of its staff, provided total remittances do not exceed the following limits –
- Initial expenses – 15% of the average annual sales / income or turnover of the Indian entity during the last 2 financial years or up to 25% of the net worth, whichever is higher.
- Recurring expenses – 10% of the average annual sales / income or turnover during the last 2 financial years.
References
Reserve Bank of India. (2024, July 24). 'Master Direction - Overseas Investment'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12710&Mode=0
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