New Overseas Investment Rules — What Do They Mean For Individuals
Here's what has changed for individuals under the new overseas direct investment rules.
The government's recent overseas investment guidelines are a positive step for individuals looking to invest more in foreign markets, as the regulations have significantly liberalised rules to make investments through corporate structures in India, according to experts.
The consolidated rules notified by the Finance Ministry spell out the numerical limits between overseas direct investment and overseas portfolio investment, round-tripping, the details around the acquisition of foreign securities, and the bounds of gifts, among other things.
Here's what has changed for individuals:
Investment Threshold
An overseas investment by any Indian becomes an ODI as per the new guidelines if the minimum threshold of an ODI in a listed company is 10% or more. It can also become an ODI, if the investment is with "control" or when subscribed as a part of the memorandum of association of a foreign entity.
"Control" means the right to appoint majority of the directors, management control, 10% or more voting rights, etc.
Anything below 10% and without "control" becomes an OPI.
"To put it in simple terms, if an individual wants to hold equity in an overseas listed company, they can freely do it as long as it is below 10%. Anything more than that will require Reserve Bank of India approval," Hemal Mehta, partner, Deloitte India told BQ Prime.
In the case of equity in an unlisted company, even one share would be considered as an overseas direct investment, said Bhavin Shah, deals leader at PwC India.
One marked shift for individuals is that even one share in an unlisted entity abroad is treated as ODI. Earlier, nominal stakes in offshore unlisted companies were permitted as portfolio investments subject to the Liberalised Remittance Scheme limits. This has now been restricted.Bhavin Shah, DealsLeader, PwC India
Round-Tripping
Contours of round tripping have also been spelled out where up to two layers of subsidiaries do not require RBI approval.
Round tripping is when a resident individual or Indian entity invests in a foreign entity that already has a direct or indirect investment in India.
Two layers would mean when an individual or entity ‘A’ can invest in a foreign subsidiary ‘B’, this becomes the first layer. The second layer would be when the subsidiary 'B' in turn invests in India, Mehta explained.
Acquisition By Way Of Gift
The new framework also mentions that individuals can acquire foreign securities in other ways, such as inheritance, gift, or even under Employee Stock Ownership Plan, and sweat equity shares, as long as they are offered by the foreign entity globally, on a uniform basis.
"It is now expressly provided that a resident individual is permitted to receive a gift of foreign securities from a relative resident in India holding such securities in accordance with the law," notes Sayta.
Further, a resident individual can acquire foreign securities by way of a gift from a person resident outside India too, but this would be subject to the provisions of the Foreign Contribution (Regulation) Act, 2010.
NOC Requirement
The objection certificate requirement is applicable from lender bank, regulatory body, or investigative agency where the account is considered a non-performing asset, the individual has been deemed a willful defaulter, or is under investigation by any of the enforcement agencies.
"I think it's a fairly reasonable move to protect the interests of the lenders / impacted parties from assets being sent outside India, to which it becomes difficult to seek recourse," Shah told BQ Prime. "Also, the regulations provide for a time-line of 60 days for the concerned agency to decide on the NOC, else it would be deemed to be granted," he said.
Overseas investment in an IFSC
The new rules also include overseas investment in an International Financial Services Centre by a resident individual.
The guidelines read:
A person resident in India may make contribution to an investment fund or vehicle set up in an IFSC as OPI.
A resident individual may make ODI in a foreign entity, including an entity engaged in financial services activity, except in banking and insurance, in IFSC, if such entity does not have subsidiary or step down subsidiary outside IFSC where the resident individual has control in the foreign entity.
The new regulations, however, are not without challenges. The issue or transfer of equity capital of a foreign company will be subjected to arms-length pricing.
This may impose some practical challenges considering the obligation is now shifted to authorised dealer banks, Mehta Deloitte India said.
He noted that arm's length pricing could deprive the flexibility in negotiations and a range in pricing.
Further, with the entire onus shifted to authorised dealers, Mehta said there is a risk the authorised dealer could be more conservative as their compliance burden has increased.
