Decoding the revised overseas investment regime

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

India Inc. is an integral part of the global economy, resultantly the exchange control regulations play a crucial role in cross border transaction daily. Many changes were awaited by the Indian entrepreneurs, which reflected the government’s intent to promote ease of doing business, and flexibility in business operations at a global level.

The same has now, one year after introducing the draft rules and regulations for feedback from the stakeholders have introduced the revised overseas investment regime. On August 22, 2022, the Ministry of Finance and the Reserve Bank of India (“RBI”) have notified the Revised Overseas Investment guidelines (Revised OI Regime) and following are our key observations.

Dilemma encircling ‘Round Tripping’

During the subsistence of the erstwhile regime, the Indian start-ups had no clarity with regards to round tripping. Round tripping was triggered when the Indian Businesses had their holding company overseas having their active business interests in India (ODI- FDI Structures). This posed a significant barrier for the Indian businessmen to invest in a company overseas as it was previously allowed only with the prior approval of the RBI. The revised OI Regime is in line with ease of doing business which will act as a catalyst to bolster the global economy.

“The revised OI regime has provided clarity with regards to the relaxation to the ODI-FDI structures by allowing the persons resident in India to invest in a foreign entity that has up to two layers of subsidiaries, however whether the relaxations will apply to the resident individuals is still open to interpretation as the reading of the revised OI Rules and revised OI Directions is cryptic, ” said CS. Adv. Shehbaazali Fazalbhoy, Associate Partner at Water And Shark Legal LLP).

ODI in Strategic Sector

India has the third largest start-up ecosystem in the world and the inflow of the FDI in 2021 – 22 has hit all-time high of 83.57 billion dollars. The revised OI Regime signifies that the country is not limiting its resilience to FDI but has also paved a way for ODI in the strategic sector so that the Indian entrepreneurs are no longer deprived of investing in the foreign start-ups.

Investment in strategic sectors such as energy and natural resources such as oil, gas, coal, mineral ores, submarine cables and start-ups are now permissible under the revised OI Regime. The RBI has allowed the persons resident in India to invest overseas in the strategic sectors without the prior approval of the RBI provided the investments are made from the internal accruals of the Indian entity, and in case of individuals, from their own funds.

“Pertinently, the word internal accruals may have been brought in by the RBI with the probable rationale of not depleting foreign exchange reserves. This will curtail the persons resident in India to go with the global trend of aggressive speculation on start-ups, thus may help preserve the crucial foreign exchange. The RBI in the revised OI Regime seems to have adopted a balanced approach,” said Harsh Patel, Founder & Managing Partner at Water And Shark Legal LLP.

Relaxation in norms for payment of consideration

It is pertinent to reiterate that the revised OI Regime is in consonance with the government’s intent to promote ease of doing business and to enable the businesses expand overseas.

Under the erstwhile guidelines, the Indian businesses making overseas investments had to pay a lump sum consideration upfront, this posed significant challenges to the Indian businesses by constricting their expansion overseas.

Revised OI Regime have introduced the concept of deferring the payment of the purchase consideration while acquisition of foreign securities for the first time. The period of deferment however shall be required to be defined upfront.

“With the permissibility of deferred payment of consideration, Indian investors shall have further flexibility in structuring their investments and the move shall encourage and expedite business expansions and the acquisitions globally,” said Adv. Nikita Mulay, Associate at Water And Shark Legal LLP.

Overseas Investment in Financial Sector such as Fintech

Till now only regulated financial sector companies were allowed to be a part of the fin-tech companies overseas, resultantly the businesses were required to invest in NBFCs which acted as a barrier for the Indian investors who wanted to be a part of fin-tech companies based in various jurisdictions of the western world. The Revised OI Regime has now dispensed the erstwhile requirement and has allowed the Indian entity which is engaged in non-financial sector to invest in financial services sector, except banking and insurance.

“These revisions have paved a way for more liberalised regime for the overseas investments in financial sectors, which will enable the Indian investors to participate and invest in the new age technology based financial businesses such as WEB-3, metaverse, crypto, etc. This will increase the number of Indian technology companies investing in WEB-3 thereby enabling the boom of the crypto economy,” said Harsh Patel.

Over the past few years, the government has been cultivating a conducive environment for the businesses and start-ups ecosystem. India now has fourth largest GDP in the world. In the earlier regime the emphasis was on control and now the emphasis has been shifted towards the management of the overall control of the exchange regulations. This is evidenced by the fact that many transactions which were previously a part of the approval route, have been brought under the purview of the automatic route. This will therefore enable and encourage the Indian businesses to expand and grow at a faster pace.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow