RBI: Foreign Exchange Management (Overseas Investment) Regulations, 2022

The Foreign Exchange Management (Overseas Investment) Regulations, 2022 were notified by The Reserve Bank of India on 2 August 2022. Under the new regulations, share capital purchased from a foreign entity will be treated as ODI and the payment of this consideration will be deferred for a specified period as stipulated in the contract between the foreign entity and the Indian entity. In this article, let us have a look at Foreign Exchange Management Regulations.

RBI Overseas Investment Rules 2022

On 22 August 2022, the Reserve Bank of India issued the Foreign Currency Investment Management Guidelines 2022 (“Regulations”) to simplify the existing overseas investment framework and adapt to current business and economic developments. These regulations will incorporate the existing regulations i.e. Overseas Investment and Acquisition and Transfer of Immovable Property outside India Regulations, 2015. These regulations address the following:

• Financial obligations of Indian entities through various means: non-equity, debt, guarantee, and pledge or charge.
• Acquisition or transfer— deferred payments
• Responsibilities of Indian Resident
• Reporting requirements for foreign investments
• Reporting delay
• Restrictions on other financial obligations/transfers

The financial commitment of Indian entities through various regimes

Modes other than Equity Capital: An Indian entity may borrow or invest in any debt instrument issued by a foreign entity or extend a non-fund-based liability if it is eligible to make an overseas direct investment [“ODI”] and such ODI should be in a foreign entity. In addition, the Indian entity has acquired control over the foreign entity by taking on such liabilities.

Debt: An Indian entity may borrow or invest in any debt instruments issued by a foreign entity provided that such borrowings are properly backed by a loan agreement in which the interest rate is charged for transactions between two related parties that are conducted as if they were unrelated, so there is no conflict of interest.

Guarantee: The following can be issued to issue a guarantee on behalf of a foreign entity:

• Corporate or performance guarantee by an Indian entity
• Corporate or performance guarantee from a group of Indian entities in India – it is a holding company (holding 51% stake in an Indian entity), a subsidiary company (51% held by an Indian entity), or a promoter group company which should be a legal entity.
• Personal guarantee of a resident individual promoter.
• A bank guarantee backed by a counter guarantee or collateral by an Indian entity and issued by a bank in India.

Pledge or charge: In the case of a financial obligation by way of pledge, the Indian entity may pledge the equity of the foreign entity that it holds directly in the foreign entity in favor of an Authorized Dealer Bank [“AD”] or a public financial institution in India or an overseas creditor, for itself or any foreign entity in which he conducted ODI received fund or non-fund resources.

Acquisition or transfer- Deferred payments

The payment of the consideration amount for the share capital may be postponed for a certain period from the date of conclusion of the contract, provided that the foreign securities corresponding to the total consideration are transferred or issued by the seller to the buyer in advance and the full and final assessment is in accordance with the applicable price guidelines.

Obligations of Indian Residents

If an Indian resident’s investment in the share capital of a foreign entity is categorized as ODI, the investment will be recognized as ODI even if it falls below 10% of the paid-up share capital or the person loses control of the foreign business. In addition, any Indian resident who has acquired and continues to hold share capital in any foreign company may invest in the share capital issued by such company as a rights issue or acquire bonus shares subject to the conditions specified in these rules.

Reporting requirements for foreign investments

A report on overseas portfolio investments or transfers must be filed within 60 days of the end of the half-year in which such investment or transfer occurred, either in September or March. In addition, each foreign firm must submit an annual performance report by December 31 of each year.

Process for reporting overseas investment requirements

A person resident in India who is interested in investing or reducing investment or any financial commitment in a foreign entity shall report to the following:

• Financial Commitment: At the time of making an external payment or financial commitment, whichever is before.
• Cancellation of investments: Sales proceeds will be realized within 30 days.
• Restructuring: Restructuring shall take place within 30 days from the date of such restructuring

The report must be submitted within 60 days of the date of such transfer by the resident. The Foreign Exchange Management (Overseas Investments) Regulations 2022 require an Indian resident who owns equity in a foreign entity to file an annual performance report or APR for such investment. The report must be given due consideration of the procedure and should be submitted to the Ministry of Statistics and Information Management, RBI.

Reporting delay

A late filing fee must be paid in case of late reporting. This option is available for a maximum of 3 years from the date of application.

Limitation of other financial obligations

An Indian resident who has entered into a financial obligation to a foreign entity under the Act or its rules or regulations shall not make any further financial obligations, whether the fund or otherwise, directly or indirectly, to such foreign entity or transfers of such investment until any remediation of any delay in reporting.

Final words

In collaboration with the Reserve Bank, the Government of India undertook a comprehensive exercise to simplify these regulations. The Draft Foreign Exchange Management (Overseas Investment) Rules and the Foreign Exchange Management (Overseas Investment) Regulations were also made available for public comment. Given the changing needs of Indian businesses in an increasingly interconnected global market, Indian corporations must engage with the global value chain.

The updated FDI regulatory framework simplifies the existing FDI framework and is linked to current business and economic trends. Clarity on overseas direct investment and overseas portfolio investment has been introduced, and several transactions related to overseas investment, which were previously subject to clearance, are now subject to automatic approval, greatly facilitating the ease of doing business.