The Ministry of Finance notified the new FEMA Overseas Investment Rules and Regulations yesterday and made some significant changes to the framework for allowing investment outside India by Indian entities as well as resident individuals:
1. Investments by Indian Entities into a Foreign Entity:
In a first, the new rules seem to permit investments by Indian entities into a foreign entity which has invested or invests into an Indian company, popularly called ‘round trip’ structures, subject to certain safeguards on layering of subsidiaries. In the context of foreign entities, subsidiary has been defined based on control (including more than 10% voting rights). Quite a welcome move to enable Indian businesses invest into global companies which also have an India presence as also to create efficient structures for global expansion and fund raising.
2. Investments in Less Than 10% Equity:
Investment in less than 10% equity of an unlisted foreign company has been permitted under the portfolio route under select circumstances (swap, rights issue, merger etc).
3. ODI by Existing Indian Companies:
In an interesting move, ODI by existing Indian companies not engaged in financial services has been permitted into foreign companies engaged in financial services subject to profitability track record for 3 years.
4. RBI Approval For Any Fresh Investment by Companies:
The requirement of RBI approval for any fresh investment by companies in loan default or under investigation by CBI, ED etc has been replaced with the requirement of an NOC by these agencies or banks. Similar changes brought in for disinvestment. Interestingly, the definition of disinvestment has been amended to include extinguishment of rights in shares, which should cover cases involving write off of equity investment by way of a reduction of capital by the overseas invested company.
5. RBI Approval For Restructuring The Balance Sheet:
The requirement of RBI approval for restructuring the balance sheet of the overseas investee company involving write off of more than 25% of the amount invested has been done away with. If amounts invested exceed USD 10 mn, valuation report needs to be furnished.
6. Gift of Foreign Security From Non-Resident:
For resident individuals, gift of foreign security from non-resident has been permitted subject to compliance with FCRA. Further, gift from residents is permitted only if they are relatives.
7. Liquidation Of The Overseas Company is Permitted:
Transfer or liquidation of the overseas company is permitted only post one year of holding by the Indian entity – while the earlier Regulations required the overseas company to be in operation for an year and filing of one APR by the Indian entity, the Regulations have now made it clear that a one year holding period is required before any transfer of shares can be made.
