TMI BlogForeign Exchange Management (Overseas Investment) Directions, 2022X X X X Extracts X X X X X X X X Extracts X X X X ..... In this direction, a significant step has been taken with operationalisation of a new Overseas Investment regime. Foreign Exchange Management (Overseas Investment) Rules, 2022 have been notified by the Central Government vide Notification No. G.S.R. 646(E) dated August 22, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022 have been notified by the Reserve Bank vide Notification No. FEMA 400/2022-RB dated August 22, 2022 in supersession of the Notification No. FEMA 120/2004-RB dated July 07, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] and Notification No. FEMA 7 (R)/2015-RB dated January 21, 2016 [ Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 ]. The new regime simplifies the existing framework for overseas investment by persons resident in India to cover wider economic activity and significantly reduces the need for seeking specific approvals. This will reduce the compliance burden and associated compliance costs. 3. Some of the significant changes brought about through the new rules and regulations are summarised belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicability of OI Rules/Regulations/Directions 3 Permission for making overseas investment 4 Approval from the Central Government 5 Approval from the Reserve Bank 6 No Objection Certificate (NOC) from the lender bank/regulatory body/investigative agency 7 Rights issue and bonus shares 8 Acquisition of a foreign entity through bidding or tender procedure 9 ODI in startups 10 Acquisition or transfer by way of deferred payment 11 Mode of Payment 12 Pricing Guidelines 13 Transfer or liquidation 14 Restructuring 15 Opening of Foreign Currency Account abroad by an Indian entity 16 Obligations of the Person Resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial sector in the host jurisdiction and set up as a trust outside India, the liability of the person resident in India shall be clear and limited not exceeding the interest or contribution in the fund in any manner. Further, the trustee of such fund shall be a person resident outside India. (ii) strategic sector shall include energy and natural resources sectors such as Oil, Gas, Coal, Mineral Ores, submarine cable system and start-ups and any other sector or sub-sector as deemed fit by the Central Government. The restriction of limited liability structure of foreign entity shall not be mandatory for entities with core activity in any strategic sector. Accordingly, Overseas Direct Investment (ODI) can be made in such sectors in unincorporated entities as well. An Indian entity is also permitted to participate in a consortium with other international operators to construct and maintain submarine cable systems on co-ownership basis. AD banks may allow remittances for ODI in strategic sector after ensuring that Indian entity has obtained necessary permission from the competent authority, wherever applicable. (iii) control means the right to appoint majority of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convertible instruments. Accordingly, any instrument which is redeemable or non-convertible or optionally convertible shall be treated as debt for the purpose of OI Rules/Regulations/Directions. (viii) financial commitment by a person resident in India means the aggregate amount of investment by way of ODI, debt other than Overseas Portfolio Investment (OPI) and non-fund-based facility or facilities extended by it to all foreign entities. An Indian entity may lend or invest in any debt instruments issued by a foreign entity or extend non-fund based commitment to or on behalf of a foreign entity, including overseas SDSs of such Indian entity, subject to the following conditions: the Indian entity is eligible to make ODI; the Indian entity has made ODI in the foreign entity; the Indian entity has acquired control in the foreign entity on or before the date of making such financial commitment. (ix) Overseas Portfolio Investment (OPI) means investment, other than ODI, in foreign securities. The following is further provided: a) OPI shall not be made in: any unlisted debt instruments; or any security which is issued by a person res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made in these directions or OI Rules or OI Regulations to listed equity capital or a listed instrument overseas, it shall mean that such equity capital or instrument, as the case may be, shall be listed on a recognised stock exchange outside India. Part II General provisions 2. Exemptions from applicability of OI Rules/Regulations/Directions The provisions contained in the OI Rules/Regulations/Directions shall not apply, and general permission shall be available for acquisition or transfer of any investment outside India made as per rule 4 of the OI Rules. 3. Permission for making overseas investment (1) A person resident in India may make or transfer any investment or financial commitment outside India under general permission/automatic route subject to the provisions contained in the OI Rules, OI Regulations and these directions. Accordingly, overseas investment may be made in a foreign entity engaged in a bona fide business activity, directly or through SDS/special-purpose vehicle (SPV). (2) The person intending to make any financial commitment shall fill up the Form FC as provided in the Master Direction Reporting under Foreign Exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in accordance with rule 9 of OI Rules shall be forwarded by the AD banks from their constituents to the Reserve Bank as per the laid down procedure for onward submission to the Central Government. 5. Approval from the Reserve Bank Financial commitment by an Indian entity, exceeding USD 1 (one) billion (or its equivalent) in a financial year shall require prior approval of the Reserve Bank even when the total financial commitment of the Indian entity is within the eligible limit under the automatic route. 6. No Objection Certificate (NOC) from the lender bank/regulatory body/investigative agency (1) 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 an NOC from the lender bank/regulatory body/investigative agency concerned in accordance with rule 10 of OI Rules, before making financial commitment or undertaking disinvestment. (2) Where an Indian entity has already issued a guarantee in accordance with the FEMA provisions before an investigation has begun or account is classified as NPA/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity/investor. 10. Acquisition or transfer by way of deferred payment (1) AD bank shall verify the bona fides of the transactions from the underlying agreement/documents in case of deferment of payment of consideration in accordance with regulation 7 of OI Regulations. The period of deferment shall be defined upfront. In case the remittance towards acquisition of equity capital is to be made post subscription to Memorandum of Association, the period within which such remittance is to be made shall be defined in the underlying agreement/documents/applicable laws else the remittance shall be made on or before acquisition of/setting up of the foreign entity. (2) The part of the payment towards consideration deferred by the person resident in India shall be treated as non-fund based financial commitment by such person and shall be reported accordingly. Subsequent payments towards deferred consideration shall be reported in Form FC as conversion of non-fund based financial commitment to equity. The valuation in accordance with pricing guidelines, wherever applicable, shall be done upfront. 11. Mode of Payment The mode of payment by a person resident in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining the bona fides in cases involving write-off of the investment. 13. Transfer or liquidation A person resident in India holding equity capital in accordance with OI Rules may transfer such investment in accordance with rule 17 of OI Rules. It is clarified that where the transferor is required to repatriate all the dues before disinvestment, such requirement shall not apply to the dues that do not arise on account of investment in equity or debt like export receivables, etc. 14. Restructuring (1) A person resident in India who has made ODI in a foreign entity, may permit restructuring of the balance sheet by such foreign entity in accordance with rule 18 of OI Rules. The aggregate investment in both the equity and debt of the foreign entity shall be taken into consideration for computing the proportionate amount of accumulated losses. However, in case the restructuring involves only equity, investment only in equity of the foreign entity may be taken into consideration for computing proportionate losses. (2) The certificate required to be furnished in accordance with rule 18 of OI Rules shall mention the amount of accumulated losses as per the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of allotment of UIN, and no separate letter is issued by the Reserve Bank. 17. Reporting (1) All reporting with respect to overseas investment by a person resident in India shall be made in accordance with regulation 10 of OI Regulations through the designated AD bank as per the revised reporting forms and instructions contained in the Master Direction Reporting under Foreign Exchange Management Act, 1999 . The reporting forms can be downloaded from Reserve Bank s website www.rbi.org.in. Any incomplete filing shall be treated as non-submission. (2) Any acquisition of foreign securities through conversion of Indian Depository Receipts (IDRs) shall be duly reported as ODI or OPI, as applicable. (3) The Annual Performance Report (APR) shall be certified by a chartered accountant where the statutory audit is not applicable, including in case of resident individuals. It is also clarified that where APR is required to be filed jointly, either one investor may be authorised by other investors for filing APR, or such persons may jointly file the APR. (4) A resident individual making overseas investment must comply with the reporting requirements as provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for delayed reporting/submissions under the Notification No. FEMA 120/2004-RB and earlier corresponding regulations, up to three years from the date of notification of OI Regulations. g) In case a person resident in India responsible for submitting the evidence of investment or filing any forms/returns/reports, etc. as per OI Regulations/earlier corresponding regulations, neither makes such submission/filing within the specified time nor makes such submission/filing along with LSF as provided in regulation 11 of OI Regulations, such person shall be liable for penal action under the provisions of FEMA, 1999. (3) The LSF may be paid by way of a demand draft drawn in favour of Reserve Bank of India and payable at the Regional Office concerned (in accordance with UIN mapping given in the table below). Sr.No UIN with prefix UIN mapped to 1. AH RO Ahmedabad 2. BG RO Bengaluru 3. BL or BY or PJ RO Mumbai 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further provided: (1) In case of swap of securities both the legs of transaction shall comply with FEMA provisions, as applicable. (2) In case of investment in foreign entity by a registered Partnership firm, it will be in order for individual partners to hold shares for and on behalf of the firm in the foreign entity if the host country regulations or operational requirements warrant such holdings. (3) Financial commitment by way of debt [regulation 4 of OI Regulations]- AD bank shall facilitate an outward remittance towards financial commitment by way of debt only after obtaining the necessary agreement/documents for ensuring the bona fides of the transaction. An Indian entity shall not lend directly to its overseas SDS. Further a resident individual shall not make financial commitment by way of debt. (4) It is provided with respect to financial commitment by way of Guarantee [regulation 5 of OI Regulations] that- a) In the case of performance guarantee, time specified for the completion of the contract shall be treated as its validity period. b) No prior approval from the Reserve Bank shall be needed for remitting the funds from India on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n A above) in India [including the assets of its group company or associate company, promoter and / or director]. AD bank or a public financial institution in India or an overseas lender. Fund/non-fund based facility for any foreign entity/its SDS outside India The value of charge or the amount of the facility, whichever is less Overseas or Indian lender. fund/non-fund based facilities for Indian entity. Nil. C) Create charge on the assets outside India of the foreign entity/ its SDS outside India. An AD bank in India or a public financial institution in India. Fund/non-fund based facility for any foreign entity/its SDS outside India. The value of the charge or the amount of the facility, whichever is less. Fund/non-fund based facility for Indian entity. Nil. a debenture trustee registered with SEBI in India. fund based facilities for Indian entity. Nil (6) Financial commitment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in Financial Services activity except banking or insurance Indian entity has posted net profits during the preceding three financial years. However, an Indian entity not meeting 3-year profitability condition may make such ODI in a foreign entity in IFSC in India. Engaged in general and health insurance Apart from the 3 years profitability criteria, such insurance business is supporting the core activity undertaken overseas by such Indian entity. For instance, health insurance to support medical/hospital business, vehicle insurance to support the manufacturing/export of motor vehicles, etc. c) Overseas investment in any sector by banks and non-banking financial institutions regulated by the Reserve Bank shall be subject to such other conditions as may be stipulated by the regulatory department concerned of the Reserve Bank in this regard. d) A foreign entity will be considered to be engaged in the business of financial services activity if it undertakes an activity, which if carried out by an entity in India, requires registration with or is regulated by a financial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a period of six months from the date of such acquisition. (4) Resident individuals are not permitted to transfer any overseas investment by way of gift to a person resident outside India. (5) Shares/interest under ESOP/Employee Benefits Scheme - 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 in accordance with regulation 10(3) of OI Regulations. Where such investment qualifies as ODI, the resident individual concerned shall report the transaction in Form FC. (6) Foreign entities are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided (i) the shares were issued in accordance with the rules/regulations framed under FEMA, 1999, (ii) the shares are being repurchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le proprietorship or unregistered partnership firms may be made by the proprietor concerned or the individual partners concerned within their limit available under the LRS in accordance with schedule III of the OI Rules. 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. (6) Overseas investment by registered trust/society may be made under the approval route in accordance with paragraph 1 of schedule IV of OI Rules. 24. Overseas investment in an IFSC in India by a person resident in India A person resident in India may make overseas investment in an IFSC in India in accordance with schedule V of OI Rules. The following is further provided: (1) A person resident in India, being an Indian entity or a resident individual, may make investment (including sponsor contribution) in the units of an investment fund or vehicle set up in an IFSC as OPI. Accordingly, in addition to listed Indian companies and resident individuals, unlisted Indian entities may also make such investment in IFSC. (2) The restriction of making ODI only in an operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AD bank shall maintain person-wise record in respect of each foreign entity. 27. Overseas investment under OI Rules/Regulations (1) AD banks may allow remittance towards overseas investment up to the permissible limits on receipt of application in Form FC together with form A-2, duly filled in, from the person making such investments subject to their complying with the conditions prescribed in the OI Rules/Regulations/Directions. AD banks shall render themselves liable for penal action under section 11 and 13 of FEMA, 1999, if they facilitate remittances towards financial commitment without obtaining the requisite duly completed Form FC. Explanation: AD banks may note that an additional timeline of 15 days is made available to them for reporting of investments/financial commitment by their constituents to RBI in the OID application (other than first remittance, which requires to be reported in OID system before executing the transaction, to generate UIN) and is not to be availed by the Indian entities/resident individuals for submission of forms and documents to the AD bank. (2) AD banks should allow remittance towards loan to the foreign entity and/or iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmitment by way of debt) or account them as expenses in their books. It is clarified that unless recognised as financial commitment such expenses shall not attract provisions of OI Rules/Regulations. 28. General procedural instructions for online reporting (1) The existing application for online reporting of overseas investment related transactions by Authorised dealers (ADs) has provision for Maker, Checker and Authoriser. The AD Maker shall initiate the transaction and submit to the AD Checker for verification before submission to Reserve Bank. In case of delay in reporting for any reason the transaction shall be reported to RBI only after a middle management level officer designated as an authoriser ratifies it by recording the reasons for the same. (2) The AD Maker, AD Checker and AD Authoriser as above identified by the AD Bank may obtain a user-id, if not obtained already, for accessing the online OID application by submitting a request in the prescribed format as per appendix A. (3) The online reporting shall be made by the Centralised Unit/Nodal Office of AD banks. The overseas investment application is hosted on the Reserve Bank's Website at https ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. A.P. (DIR Series) Circular No. 53 June 27, 2008 22. A.P. (DIR Series) Circular No. 7 August 13, 2008 23. A.P. (DIR Series) Circular No.14 September 5, 2008 24. A.P (DIR Series) Circular No. 5 July 22, 2009 25. A.P. (DIR Series) Circular No. 36 February 24, 2010 26. A.P (DIR Series) Circular No. 45 April 1, 2010 27. A.P (DIR Series) Circular No. 69 May 27, 2011 28. A.P (DIR Series) Circular No. 73 June 29, 2011 29. A.P (DIR Series) Circular No. 96 March 28, 2012 30. A.P (DIR Series) Circular No. 97 March 28, 2012 31. A.P (DIR Series) Circular No. 101 April 2, 2012 32. A.P (DIR Series) Circular No. 131 May 31, 2012 33. A.P (DIR Series) Circular No. 133 June 20, 2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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