Finance ministry tweaks overseas investment rules. Check out the details here

If you are an Indian company or a startup or even a big family office looking to acquire some businesses abroad, you may have to contend with some new rules mandated by the government.

What do the new rules say?

The new rules, effective from Monday, have made an explicit distinction between Overseas Direct Investments—all investments in unlisted foreign entities and more than 10% in listed foreign entities—and Overseas Portfolio Investments—investment by listed companies in foreign listed securities.

The rules say that all ODI transactions must happen at fair value.

Besides, round tripping structures now do not require approval from the Reserve Bank of India, if the structure involves less than two levels of subsidiaries.

The rules also clarified that gift of foreign securities is permitted only between relatives. Earlier, anyone could have gifted securities to Indian persons.

What has the finance ministry actually said in its notification?

According to the new regulations notified by the finance ministry, barring banking and insurance companies, non-banking finance companies and government entities, any domestic entity cannot make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries.

What more do the new rules say?

The new rules seek tightening of the reporting requirements for domestic entities opting for the ODI route, wherein domestic firms will have to submit a slew of evidence of investments within the time specified. Failing this, the firms will attract late submission fees as prescribed by the RBI. The central bank is expected to come out with a detailed circular on this.

The ODI route is for non-individual entities like corporates and trusts. Individuals use a different route to remit money outside called the Liberalised Remittance Scheme (LRS).

Okay, so what will happen to the current overseas investment rules?

The overseas investment rules, notified under the Foreign Exchange Management Act (FEMA), will subsume all existing rules pertaining to overseas investment along with those for acquisition and transfer of immovable property outside India. The Reserve Bank of India will administer the new regulations, the ministry of finance notified.

“The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics,” the ministry stated.

What more has the ministry said about the rationale for the new rules?

The government has said that the new rules will bring clarity on overseas investment and related transactions, which were earlier under approval route of the central bank. Now all those will be under automatic route which will significantly enhance ease of doing business

The RBI had earlier released a draft of Foreign Exchange Management (Non-debt Instruments - Overseas Investment) Rules, 2021, for public comments.