Overseas Direct Investment: An Overview for Indian Resident Individuals

Introduction:
In today’s highly competitive business world, expansion has become a crucial factor for the survival and growth of any organization. With increasing globalization and new opportunities emerging in foreign markets, Indian entities and resident individuals are now looking to tap into overseas ventures. Recognizing the importance of facilitating such expansion, the Indian government took a significant step in August 2022 by overhauling the regulations governing overseas investment by Indian entities and resident individuals.
This move by the government reflects a progressive and forward-thinking approach, as it aims to harmonize the regulations and create a more favorable environment for those seeking to explore international markets. The revamp of these regulations is driven by the understanding that expanding beyond domestic borders can bring tremendous benefits, such as access to new customers, diversified revenue streams, technological advancements, and global collaborations.

Regulatory Framework:
Overseas Direct Investment (ODI) refers to investments made by Indian entities and individuals in foreign businesses. The Reserve Bank of India (RBI) and the Government of India have established a regulatory framework to govern such investments, ensuring they are made within the bounds of the law and contribute positively to India’s economic interests abroad. While Foreign Exchange Management (Overseas Investment) Rules notified by the Central Government lays down the overall rules, definition and limits pertaining to the Overseas Investments made by a person resident in India, the Foreign Exchange Management (Overseas Investment) Regulations issued by RBI establishes the procedural framework for the purpose of effective implementation of the rules notified in this regard. Further, Foreign Exchange Management (Overseas Investment) Directions issued by the Central Government establishes the directions to be followed in implementing the Regulations and Rules governing overseas Investments. Combination of reading the Regulations, Rules and the Directions, it can be summarized as under.
Foreign exchange management (Overseas Investment) Rules, 2022 prohibit making or transferring any Investment or Financial Commitment outside India by a Person resident in India unless the same is in accordance with the Rules or Regulations or Directions issued under the Foreign Exchange Management Act.
Further, the Rules stipulates that Overseas Investment can only be made in foreign entity engaged in bona fide business activity. Bona fide business activity has been defined to mean any business activity permissible under any law in force in India and the host country or host jurisdiction, as the case may be. Thus it is important that the business activity must be permissible under the laws in India as well so in order to be eligible for Investment by a Person Resident in India.
Overseas Direct Investment (ODI) is defined to mean (i) acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity, or (ii) investment in 10% or more of the paid-up equity capital of a listed foreign entity, or (iii) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
Further, the new regime has done away with the concept of Wholly owned Subsidiary and Joint Venture and has introduced a concept of Foreign Entity for making overseas investment. Foreign Entity has been defined to mean an Entity formed or registered or incorporated outside India, including in International Financial Services Centre (IFSC) in India, that has limited liability. ‘Limited liability’ would mean a structure such as a limited liability company, limited liability partnership, etc. where the liability of the person resident in India is clear and limited.

ODI Regulations as applicable to Resident Individual (RI):
Schedule III of the FEM(OI) Rules prescribe the manner in which ODI can be made by RI and summarily following Rules and Regulations apply to ODI by RI:
ODI and Overseas Portfolio Investment (OPI) by RI shall be subject to the overall ceiling under the Liberalised Remittance Scheme (LRS) of the Reserve Bank which is presently USD 250,000 per financial year.
• Foreign Entity set up are operating entity only and no further step-down subsidiaries can be acquired or set up by said foreign entity except in IFSC.
• ODI should be in foreign entity conducting bonafide activity as defined under Rule 9 of ODI Rules.
• ODI cannot be made by RI in any foreign entity involved in financial services except in IFSC.
• ODI guidelines do not allow for resident individuals to extend loan or guarantees to or on behalf of any foreign entity.
• Foreign Entity in which RI has ODI is not allowed to create any Step Down Subsidiaries anywhere except in IFSC till investment of any resident individual continues in foreign entity.
• Investment in equity capital of Foreign Entity should be in compliance with pricing guidelines as prescribed in Rule 16 of ODI Rules.
• The sources of fund through which all investment is done by RI should be from internal accruals and no funding should be done through any borrowings.
• The foreign entity should be limited liability entity and should be registered as per laws of host country (exception: when investment is being done in strategic sector or start up).

Reporting Requirements:
Resident Individuals must report their ODI transactions to the RBI through the designated Authorized Dealer bank. This includes initial reporting of the investment and subsequent changes and Annual Performance Reports.

Conclusion:
The revised regulations acknowledge the transformative power of overseas investment, not only for businesses but also for the nation’s overall economic growth. By streamlining the processes and removing unnecessary hurdles, the government has sent a clear message to Indian entities and resident individuals that it is fully supportive of their aspirations to explore international opportunities.
The ODI policy framework aims to facilitate external engagements of Indian businesses while ensuring that the investments are made in a manner that is legally compliant and economically beneficial. It is crucial for Indian Parties and Resident Individuals to stay informed about the regulatory changes and ensure adherence to the guidelines laid out by the RBI.