The Finance Ministry notified the consolidated rules for overseas investment by Indian entities to promote ease of doing business. The Foreign Exchange Management (Overseas Investment) Rules, 2022 will subsume regulations relating to the Overseas Investments and Acquisition and Transfer of Immovable Property Outside India Regulations, 2015.
The new rules will bring in many changes that could impact the acquisition and merger decisions of Indian residents, including startups and corporates. The finance minister stated that the revised regulatory framework for overseas investment simplifies the existing overseas investment framework and aligns with the present economic and business dynamics.
With the consolidated overseas investment rules, the government has given clarity to overseas portfolio investment and overseas direct investment. Various overseas investment-related transactions are now under the automatic route, which was earlier under the approval route, significantly enhancing the ease of business.
Last year, the government issued the draft Foreign Exchange Management (Overseas Investment) Regulations and Foreign Exchange Management (Overseas Investment) Rules in the public domain for consultations. The consolidated rules have included overseas investment in IFSC (International Financial Services Centre) by a person resident in India. A gazette notification was issued by the Finance Ministry, which provided that a person resident in India can make overseas investments in an IFSC in India within limits.
A person in India can contribute to an investment vehicle or fund set up in an IFSC as OPI (Overseas Portfolio Investment). A resident individual can make an ODI (Overseas Direct Investment) in a foreign entity in IFSC, including entities engaged in financial services activity, except in insurance and banking. However, such an entity should not have a step-down subsidiary or subsidiary outside IFSC where the resident has control of the foreign entity.
The notification also stated that an unauthorised dealer bank, including an overseas branch, can acquire or transfer foreign securities according to the terms of the host jurisdiction or host country in the ordinary course of its banking business.
An individual can make an ODI through equity capital investment or OPI subject to the overall ceiling under the LRS (Liberalised Remittance Scheme) of the Reserve Bank of India. Currently, the LRS allows an individual USD 2,50,000 outward investment per year.
An Indian entity can make OPI not exceed 50% of its net worth as per its last audited balance sheet date. Corporates can make ODI through equity capital investment to undertake a bonafide business activity. The total financial commitment done by an Indian entity in all foreign entities taken together at the time of undertaking such commitment should not exceed 400% of its net worth as per its last audited balance sheet date or as directed by the Reserve Bank of India.
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