5 October 2021
The Reserve Bank of India through notification dated 9 August 2021 has issued the Overseas Investment Rules governing overseas investment in equity and acquisition and transfer of immovable property outside India by persons resident in India. The acquisition and transfer of immovable properties outside India by persons resident India is presently governed under Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 and overseas investments are governed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Securities) Regulations, 2004 (“ODI Regulations”). Overseas Investment Rules were open for public comments till 23 August 2021 and are proposed to be finalised after public consultation. The Overseas Investment Rules are not applicable to any investment made outside India by a unit set up in an International Financial Services Centre (“IFSC”)
Under the Overseas Investment Rules, acquisition of immovable property by individuals is now permitted through the purchases out of remittances sent under the Liberalized Remittance Scheme (“LRS”) and out of income or assets outside India (other than overseas direct investments (“ODI”)). Under the current regime, acquisition of immovable property by individuals is permitted by way of gift, and inheritance or acquisition by way of purchase from foreign exchange held in resident foreign currency account or joint acquisition with a relative who is a person resident outside India, provided there is no outflow of funds from India.
In relation to transfer of immovable property outside India, a person reason resident in India is required to obtain a general or specific permission from RBI under the current regime for such transfer. Under Overseas Investment Rules, transfer of immovable property by a person resident in India is permitted by way of (a) gift to a person resident in India; (b) inheritance to an individual; or (c) sale.
In relation to transfer of foreign securities, the ODI Regulations permits transfer by way of pledge for obtaining fund based or non-fund based facilities in India from an authorised dealer or by way of sale of shares of a joint venture or wholly owned subsidiary to another Indian party. Under the Overseas Investment Rules, a person resident in India holding equity capital may transfer such investment by way of sale to another person resident in India or a person resident outside India. In case of transfer on account of merger, amalgamation or demergers or buyback or liquidation, the transfer is required to be approved by the competent authority as per Indian laws or the laws of the host country.
In case the person resident in India, making any financial commitment or undertaking disinvestment, has an account appearing as a special mention account or a non-performing asset or is a wilful defaulter or if such person is under investigation by any regulatory authority, then such person is required to obtain a no-objection certificate as per the Overseas Investment Rules from the concerned lender bank or regulatory body or investigative agency for making any financial commitment or undertaking disinvestment.
For restructuring, under the ODI Regulations, a listed Indian party, who has set up a wholly owned subsidiary abroad or have at least 51% (fifty one percent) stake in an overseas joint venture, is permitted to write off capital and other receivables, such as loans and royalty, in respect of the joint venture or the wholly owned subsidiary up to 25% (twenty five percent) of the equity investment. Under the Overseas Investment Rules, Indian entity which has made an ODI may be permitted for restructuring of the balance sheet by the foreign entity for the previous 2 (two) years subject to ensuring compliance with reporting and documentation requirement. Further, the diminution in the total value of the outstanding dues towards the Indian entity, after such restructuring, should not exceed the proportionate amount of accumulated losses.
The ODI Regulations prohibits an Indian party i.e., a company or a partnership or a limited liability partnership incorporated or registered under the applicable Indian laws, from making any direct investment in foreign entity engaged in real estate business or banking business. The Overseas Investment Rules further extends these restrictions. As per the Overseas Investment Rules a person resident in India is restricted from making any ODI in a foreign entity engaged in (a) real estate activity; (b) gambling in any form; and (c) offering financial products linked to Indian Rupee except for products offered in an IFSC. Other general restrictions under Overseas Investment Rules include (a) restriction from making overseas investment in Financial Action Task Force and International Organization of Securities Commission non-compliant jurisdictions; (b) financial commitment by a person resident in India in a foreign entity that has invested or invests in India where such financial commitment is designed for the purpose of tax evasion or tax avoidance by such person.
The Overseas Investment Rules also prescribes for a new pricing guideline. Under the new framework, for issue or transfer of equity capital from a person resident outside India to a person resident in India, if the securities are listed then the price should be as worked out in accordance with the concerned stock exchange. In other cases, the price should be with 5% (five percent) range of the fair value arrived on an arm’s length basis as per any internationally accepted pricing methodology.
Please click here to read the Overseas Investment Rules.
