MC Explains | New Overseas Investment Rules

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India’s finance ministry on August 22 released an updated and consolidated set of rules and regulations for overseas investment. The rules, to be administered by the Reserve Bank of India, seek to simplify the norms for overseas investments in a manner that is easy to comprehend. Let’s delve deeper.

What’s the big deal?

Several types of overseas investments that earlier needed approval have now been allowed under the so-called automatic route.

For example, the issuance of corporate guarantees to or on behalf of second or subsequent-level step-down subsidiary of an Indian entity used to require the Reserve Bank of India’s approval. The new regime brings this under the automatic route.

The acquisition of equity capital in a foreign entity on a deferred payment basis and disinvestment involving write-off beyond specified limits have also been brought under the automatic route.

Moreover, the new regime permits overseas direct investment by a non-financial sector Indian entity in a foreign entity engaged in financial services activity (except banking and insurance). These investments can take place through the automatic route.

Separately, now an Indian company not engaged in financial services in India, may make Overseas Direct Investment in a foreign entity in an International Financial Services Centre, which is directly or indirectly engaged in financial services activity, except banking or insurance.

Are there any new definitions?

Overseas Portfolio Investment has now been clearly defined and the new regime demarcates Overseas Direct Investment and Overseas Portfolio Investment.

Other key terms such as ‘control’, ‘disinvestment’, ‘step-down subsidiary’ and ‘financial services activity’ have also been clearly defined.

What is restricted? 

Any Indian resident cannot make overseas direct investment in a foreign entity engaged in real estate activity; gambling in any form; and dealing with financial products linked to the Indian rupee.

Any overseas direct investment in overseas start-ups shall be made only from the internal accruals of an Indian entity and from own funds in case of individuals.

Persons resident in India cannot acquire or transfer immovable property outside India without general or special permission of the Reserve Bank of India. Such a purchase can be made out of the remittances sent under the Liberalised Remittance Scheme.

What about the strategic sectors?

The rules introduce a new concept of strategic sector, under which the government has the power to permit overseas investment in excess of the limits provided in the rules.

The sectors include energy, natural resources and any others as may be decided by the government from time to time.

Will it lead to better ease of business?

The new regime introduces the facility of a late submission fee for filing various overseas investment-related returns/documents to ease compliance requirements.

Separate reporting requirements for setting up/winding up of step-down subsidiaries or alteration in the shareholding pattern of the foreign entity have also been dispensed with.