Cross-border transactions call for stringent measures to be taken. Corporates have to go through a process that is cumbersome when it comes to cross-border transactions. An increase in the inbound and outbound process calls for an increase in the level of compliances. Foreign Exchange Management Act, 1999 (FEMA) was introduced to ensure smooth external transactions, maintaining a healthy foreign exchange market, and encourage the importance of the balance of payments.
Investment Rules under FEMA
The Foreign Exchange Management (Overseas Investment) Rules, 2022 (ODI Rules) were notified by the Ministry of Finance on August 22, 2022, and will supersede the Former Regulations. In addition, the RBI published the Foreign Exchange Management (Overseas Investment) Regulations, 2022, to supplement the ODI Rules (ODI Regulations). The RBI also issued the Foreign Exchange Management (Overseas Investment) Directions, 2022. (ODI Directions). It is worth noting that Overseas Investment by Indian Parties was previously governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (Foreign Security Regulations) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 (Property Regulations) (collectively called Erstwhile Regulations).
The need for changing and notifying the Rules arose from the fact that it was long overdue, and with the change in business needs, evolving needs of business entities in India and abroad, and an integrated global network and market, it was necessary to notify the new Rules. As a result, the Government of India undertook a thorough exercise to simplify these Regulations in consultation with the Reserve Bank of India. Additionally, it was thought that the Indian business entity needed to join a large global conglomerate in order to unlock its worth.
Mandatory compliances under FEMA
Annual Return on Foreign Liabilities and Assets
Every Indian Resident company that has made a Foreign Direct Investment (FDI) in the preceding year, including the current year, must submit the Foreign Liabilities and Assets (FLA) Return. If no such investment is made, then the company is not under any obligation to submit the FLA. Such a return must be submitted every year.
Annual Performance Report
This report is to be submitted by a Resident individual who has made an Overseas Direct Investment (ODI). It is to be provided in Form ODI Part II to the AD (Authorised Dealer) bank regarding Joint Venture or Wholly Owned Subsidiaries outside India on or before 31st December every year.
External Commercial Borrowings (ECB)
All borrowers must report all ECB transactions to the RBI through an AD Category – I Bank every month in the Form ‘ECB 2 Return’.
Single Master Form (w.e.f.30.06.2018)
- FC- GPR (Foreign Currency-Gross Provisional Return)
- FC-TRS (Foreign Currency Transfer of Shares)
- LLP-I (Limited Liability Partnership)
- CN (Convertible Notes)
- ESOP (Employee Stock Options Plan)
- DI (Downstream Investment)
- DRR (Depository Receipts)
- InVi (Investment Vehicle that has issued its units to a person resident outside India)
The RBI has made efforts to integrate the existing reporting norms and set out a procedure for filing a single master form.
Form FC- GPR
The Indian company that receives foreign investment and allots shares against such investment should file such allotment with the RBI. The company must provide details of allotment in the Form FC- GPR (Foreign Currency – Gross Provisional Return) within 30 days of allotment to the RBI.
Form FC- TRS
This form must be filed by the shareholder resident outside India or resident Indian when they transfer the shares of the Indian company from a resident to non-resident Indian or vice versa. The form FC- TRS (Foreign Currency Transfer) is submitted along with the Form FC- GPR to the authorised dealer bank, who in turn submits to the RBI.
Form ODI
A resident Indian individual who makes an overseas investment is required to submit Form ODI. Share certificates or any other documentary evidence received for investment in a foreign Joint Venture or Wholly owned subsidiary must be submitted to the designated AD within 30 days.
Key changes under the Overseas Investment Rules under FEMA, 1999
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The following new overseas regime has been announced by the Central Government and Reserve Bank of India, replacing the previous system, in the spirit of liberalization and to encourage ease of doing business.
- The “Foreign Exchange Management (Overseas Investment) Rules, 2022” were released by the central government ( Dealing with Non-Debt Instruments).
- Under Central Government Notification No. G.S.R. 646, the RBI published “Foreign Exchange Management (Overseas Investment) Regulations 2022” (Dealing with Debt Instruments) (E).
- Under RBI (Notification No. FEMA 400/2022-RB), the RBI has issued “Foreign Exchange Management (Overseas Investment) Directions 2022” (Dealing with Directions to be Followed by Authorised Dealer-Banks).
The new rule makes it easier for Indian residents to invest abroad, covers a larger range of economic activities, and minimizes the requirement for obtaining specific permissions. The new system will ease the burden of compliance and related expenses.
FAQs
changes in the new Overseas Investments Framework?
The ODI Rules’ Rule 2(1)(q): The term “ODI” is now clearly defined to cover, among other things, investments totaling 10% or more of a listed foreign entity’s paid-up equity capital as well as investments made with control but totaling less than 10% of that entity’s paid-up equity capital.
In other words, when an investment made by an Indian resident into the equity capital of a foreign company is designated as an ODI, it will remain such even if it drops below 10% of the paid-up equity capital or if the Indian resident loses control over the foreign company. A person residing in India must be in control of the foreign entity in the event that investment is made in its debt instruments.
Investments made as part of a foreign firm or entity’s memorandum of association or as unlisted equity capital purchases are also included in the definition of ODI.
Additionally, the former restrictions included direct foreign investment made by an Indian party in a joint venture (JV) or wholly owned subsidiary. These terminologies have been modified, and the concept phrase of “foreign entity,” which refers to a company created, registered, or incorporated outside of India with limited liability, has replaced both JV and WOS under the new amendment. As a result, per the aforementioned definition, investments in any foreign entity with limitless responsibility are prohibited. A member of an International Financial Services Center is also included (IFSC) in India.
“Indian Entity” is used in place of “Indian Party.”: Under the new regime, the concept of “Indian Entity,” which shall mean a Company or a Limited Liability Partnership or a Partnership Firm or a Body Corporate incorporated under any law currently in effect, has replaced the concept of “Indian Party (IP),” wherein all investors from India in a foreign entity were collectively considered to be IP. Each investor entity must be treated as a distinct Indian entity.
Investments eligible for Overseas Investment: Overseas Investment (OI) is defined as a financial commitment and an overseas portfolio investment made by an Indian resident.
Financial Commitment refers to the total amount of investment made by an Indian resident in the following ways:
- Overseas Direct Investment (ODI)
- Debt in a foreign entity or entities in which ODI is formed (other than OPI).
- Non-funding facilities provided to or on behalf of such foreign organizations or entities.
The amendments under the Rule “Overseas Investment Rules under FEMA, 1999”?
- Round-tripping is a structure in which an investment is made in a foreign entity that afterward makes investments or receives investments in the home nation. The RBI made it clear in the ODI FAQ that the structure needs to receive prior clearance from the RBI. The following structure, up to two layers of subsidiaries, is permitted according to the guidelines. a positive step by the government to make it easier for Indian start-ups and businesses to receive funding from PE and VC investors.
- The guidelines clarify the Foreign Portfolio Investment (FPI), which was previously unclear because it was not specified by the regulation. FPI refers to investments that are less than 10% of the paid-up equity capital of a listed foreign entity or investments that do not include control in the paid-up equity capital of a listed foreign entity.
- “Disinvestment” refers to the partial or whole extinction of rights to equity capital acquired in accordance with these regulations;
- The regulations have changed the requirements that must be met when any Indian resident makes a financial commitment or undertakes disinvestment.
- Has an account that appears to be an unprofitable asset; or
- Any bank classifies them as deliberate defaulters;
- The requirement that the RBI must approve any restructuring of an overseas entity’s balance sheet that involves a capital write-off of more than 25% of the investment has been eliminated by the guidelines. According to the guidelines, a valuation report must be filed in cases of diminution of the entity where the original investment was more than USD 10 million or when the amount of such diminution exceeds 20% of the total value of the outstanding dues.
- The rule states that ODI investments in start-ups recognized under the host nation’s or host jurisdiction’s laws, as the case may be, shall be made by an Indian entity only from internal accruals, whether from the Indian entity or group or associate companies in India and in the case of resident individuals, from such an individual’s own funds.
- The rule makes it clear that a resident individual may receive gifts of foreign securities from relatives who live in India. Prior to now, gifts from any person may be used to acquire foreign securities. The rule further states that, in compliance with FCRA, a resident individual may receive gifts of foreign securities from people who reside outside of India.
- The newly announced guidelines are in line with the present commercial and economic trends and will help India become a global impact producer.
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