“You can never cross the ocean unless you have the courage to lose sight of the shore.”
Columbus’s expeditions in the late 14th century ushered in a period of exploration for the modern world. This has been aptly described as the ‘Age of Discovery’. Centuries later, the allure of offshore opportunities continues to enchant and has grown multi-fold. Today, these opportunities need not be sought out by deploying a flotilla, but require you to simply navigate certain regulatory and global banking channels.
Based on reports1, 10-20% of the wealth of high net worth families from developed countries is geographically diversified. In contrast, India’s high net worth families have deployed less than 1% of their funds internationally. Despite regulatory challenges, overseas investments in foreign securities by resident individuals rose from USD 195.5 million in FY2014-15 to USD 746.6 million in FY2021-22, under the Liberalised Remittance Scheme (“LRS”).
Acknowledging this trend and in keeping with the spirit of liberalisation and ease of doing business, the Finance Ministry has significantly revamped, relaxed and simplified the exchange control framework for overseas investments, by notifying the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022, and Foreign Exchange Management (Overseas Investment) Directions, 2022 (collectively referred to as “New Regime” in this article). With effect from August 22, 2022, the New Regime has, among other things, introduced several path-breaking reforms for resident individuals and their investment entities, such as:
- expansion of the scope of overseas investments under the automatic route (i.e. without prior approval);
- providing much-needed clarification on the definition of Overseas Portfolio Investments (“OPI”) vis-à-vis Overseas Direct investments (“ODI”);
- liberalising access to foreign currency financing for India head-quartered multi-national companies by allowing certain round-trip structures;
- enabling investments in start-ups; and
- permitting Indian entities engaged in non-financial activities to invest in foreign entities engaged in financial services.
This article provides an overview of the various routes that resident individuals and family offices can explore to harness the potential of global opportunities in this modern age of discovery.
The Old Regime did not specifically define the term ‘portfolio investments’ as against ODI in a joint venture or wholly owned subsidiary abroad, resulting in regulatory ambiguity, especially for resident individuals undertaking portfolio investments in unlisted entities and start-ups abroad. The New Regime provides much-needed clarity on this, by classifying overseas investment as either ODI or OPI:
|Investment in equity capital of an unlisted foreign entity (irrespective of % stake)Subscription as a part of constitutional documents of a foreign entity (irrespective of % stake)Investment of ≥ 10% of equity capital of a listed foreign entityInvestment with control of < 10% of equity capital of a listed foreign entity||Investment other than ODI, but excluding unlisted debt instruments|
|In simple terms, ODI is a strategic investment into unlisted or listed foreign entities.||In simple terms, OPI are portfolio investments into listed foreign companies.|
|E.g. Tech Mahindra’s acquisition of a US entity, Infostar LLC||E.g. a resident individual’s investment in shares of Apple, Tesla, etc.|
ODI is permitted in a foreign entity engaged in a bona fide business activity, except in real estate activity, gambling, or in rupee-linked financial products without specific approval of the Reserve Bank of India (“RBI”). The RBI has been vigilant in scrutinising if the amounts transferred outside India by domestic entities (including family offices) are, in essence, used for such ‘bona fide’ purposes. Accordingly, it is necessary to closely examine the relevant conditions and approval requirements before investing overseas under the ODI route to mitigate any regulatory risks.
A. ODI by Indian entities
An Indian entity (i.e. company, partnership firm or limited liability partnership) is permitted to make total financial commitment of up to (i) USD 1 billion or (ii) 400% of its net worth (“TFC Limit”), whichever is lower, under the automatic route. The definition of ‘net worth’ has been aligned with the Companies Act, 2013 and specifically includes even the securities premium account for computation of the TFC limit under the New Regime. However, the concept of utilising the net worth of the subsidiary/ parent company by the Indian entity which was permitted under the Old Regime has been discontinued under the New Regime. Furthermore, ODI in foreign start-ups is permitted only out of internal accruals of an Indian entity or group or associate companies in India.
The New Regime now allows certain ‘round-tripping’ or ‘ODI-FDI’ structures, i.e. investments by an Indian entity into a foreign entity, which has investments in India, subject to the structure not resulting in more than two layers of subsidiaries. Interestingly, the restriction on round-trip structures designed for the purposes of tax evasion/ tax avoidance, specifically mentioned in the draft rules published for public consultation last year, has been dropped in the New Regime.
Earlier, only regulated Indian entities in financial sectors (NBFCs/ CICs) were permitted to set up overseas vehicles (considered to be engaged in financial services activity), which in turn undertook portfolio and/ or strategic investments globally. Now, Indian entities from non-financial sectors too are permitted to undertake ODI in a foreign entity engaged in financial services activity, subject to certain additional conditions, which are as under:
|Indian entity||Activity of foreign entity||Additional conditions|
|Engaged in financial services activity||Financial services activity, including banking and insurance||Indian entity has posted net profit during previous three financial years|
Indian entity is registered/ regulated by a financial services regulator such as RBI, SEBI, etc.
Prior approval is obtained from a regulator in India and foreign jurisdiction, as may be required
|Not engaged in financial services activity||Financial services activity, excluding banking and insurance activity (apart from general insurance ancillary to business)||Indian entity has posted net profit during previous three financial years|
B. ODI by trusts/ societies
ODI by a registered trust/ society is permitted, subject to the following key conditions:
- It is engaged in the educational sector or has hospital(s) in India;
- It is in existence at least for a period of three years;
- The constitutional documents permit the proposed ODI, and such investment has the approval of the trustees/ relevant managing body;
- It undertakes investments in the same sector(s) in a foreign entity; and
- Special licence/ permission has been obtained from the Ministry of Home Affairs, Central government, or local authority, as applicable.
Private family trusts that do not satisfy the conditions mentioned above, are not permitted to undertake overseas investments. However, such private family trusts may evaluate setting-up Indian entities eligible to undertake overseas investments under the automatic route, in compliance with the New Regime.
C. ODI by resident individuals
Resident individuals can undertake ODI in a foreign entity, within the overall prescribed ceiling for resident individuals under the LRS i.e. USD 250,000. However, ODI by resident individuals is permitted only in an operating foreign entity, not engaged in financial services activity and which does not have a subsidiary or step-down subsidiary.
II. Overseas Portfolio Investments
Indian entities and resident individuals are not required to repatriate the original OPI or incomes earned back to India. It can be reinvested to undertake further OPI.
Limits on OPI:
|Indian entities||Up to 50% of its net worth as on the date of last audited balance sheetAdditionally, unlisted Indian entities are permitted to undertake OPI only in specified scenarios, such as by way of rights/ bonus issue, permitted capitalisation of dues, swap of securities or restructuring.|
|Resident Individuals||Within the overall ceiling prescribed under LRS i.e. USD 250,000|
Resident individuals undertaking investment in foreign countries to obtain Golden Visas or ‘citizenship by investment’ should cautiously ensure satisfaction of the applicable conditions, depending on the classification of such foreign investment as ODI, OPI or immovable property outside India.
III. Overseas investments in IFSC
A foreign entity is defined to include an entity formed in IFSC, thereby expanding the credit pool to structure financing arrangements as well as investments for Indian businesses. Indian entities and resident individuals are permitted to undertake ODI in IFSC with certain additional relaxations. Similarly, for the furtherance of OPI in IFSC, the ‘NSE IFSC’ and ‘India INX Global Access’ have emerged as new exchanges for resident individuals to invest abroad in foreign currency.
IV. Alternate Investment Funds (“AIF”)
AIFs, a preferred investment pooling vehicle for several family offices, are permitted to invest overseas, subject to conditions stipulated by SEBI and RBI from time to time. The New Regime states that any investment by AIFs in foreign entities (listed or unlisted) will be treated as OPI and, therefore, subject to reduced compliances. Furthermore, SEBI has recently done away with the requirement for the overseas investee company to have an ‘Indian connection’ (i.e. an offshore entity with some business operations in India). Such relaxations will allow Indian AIFs to truly bring in geographical diversity in their portfolios and help them compete with global peers on an equal footing.
Furthermore, resident individuals with a minimum net worth of USD 1 million in the previous financial year are permitted to invest in AIFs in IFSC (“IFSC AIFs”). These IFSC AIFs can exclusively invest overseas, without adhering to the restrictions otherwise applicable to domestic AIFs under the applicable AIF regulations, such as the requirement to obtain SEBI approval, prior to overseas investment and the inability to invest more than 25% of their investible funds overseas.
V. Overseas investments vide Offshore Trusts
Several wealthy families, with members in different corners of the world, have set up offshore trusts in a financial centre (with a favourable tax and regulatory regime) to consolidate the family’s overseas wealth and possibly mitigate the levy of multiple taxes and estate duties across jurisdictions.
As such, there are no specific regulations under the Indian exchange control regulations, governing the settlement of offshore trusts by Indian residents. Several Indian families with non-resident members have been able to populate offshore trusts with funds/ assets after obtaining prior RBI approval or an Authorized Dealer Bank confirmation, depending on the specific facts of their situation. However, resident individuals and family offices, setting up offshore trusts, should be mindful of disclosure requirements and tax implications in India so that they don’t find themselves on a slippery slope, concerning the Indian tax authorities.
The journey ahead…
The New Regime is indicative of a confident, outward-looking India that is migrating towards a ‘trust based framework’. It is a giant leap forward in creating a level playing field for resident Indians and their family offices to become a vital part of the global value chain. In our Firm’s previous blogpost (available here), we have highlighted clarifications that the Government/ RBI should provide on several nuances under the New Regime (such as on the number of layers permissible in a round tripping structure or the manner of computation of TFC Limit) to accelerate the global sail of Indian HNIs and Family Offices. While the sea appears calm, a well-drawn map is the need of the hour. It is imperative that the winds of change be carefully studied to ensure a safe and successful investment voyage.
 The Family Wealth Report 2018 by Campden Research & Edelweiss Private Wealth Management; Winvesta Investor Pulse Report (June 2021).
 Notification no. 120/ RB-2004 and the circulars and directions thereunder issued by the Reserve Bank of India