New overseas investment rules bring clarity for individuals

The ministry of finance on August 22 published new rules for overseas investments by entities in India. While the bulk of these norms pertains to investments by Indian entities and trusts, there is a section on investments made and held by resident individual Indians.

The changes come against the backdrop of a depreciating rupee, which is now worth Rs 79.87 against the US dollar, a 7.5 percent decline in value over the past year and almost 25 percent in the past five years. While the changes don’t address the currency rate directly, they seek to open up opportunities for resident individuals looking for enhanced action in the overseas investment market.

Resident Indian individuals will now have wider access to investments in overseas entities within the overall liberalised remittance scheme umbrella.

What more is there provision for?

The objective of the new set of rules is to add clarity and ease of transactions for resident Indians in matters of foreign investment and overseas ownership via equity capital.

Rules pertaining to individual resident Indians are in the context of owning equity securities in overseas entities, be it through capital, sweat equity, employee stock options, or inheritance, among other things.

To be sure, such transactions may have been possible previously as well but there were no rules defined for aspects such as roundtripping (a situation where one invests in an overseas company that has an investment or holding in an Indian company), which made execution and scrutiny of deals unpredictable.

As per the recent rules, resident Indian individuals can directly invest in an operating foreign entity even without the presence of a subsidiary company where the individual may have already owned capital. This was not the case earlier and it is now permitted even for foreign entities not in financial services.

The stake can be acquired through specified means including direct capitalisation, mergers, demergers, sweat equity, gift and inheritance. Prima facie, the rules state that the stake acquired through such transactions should be less than 10 percent of the equity capital of the foreign entity.

“The changes provide clarity in some areas to affected individuals who up till now were reliant completely on authorised dealer experience,” said Pritha Jha, a partner at Pioneer Legal. “At the same time, it is not clear whether all resident individual investments are now capped at LRS (liberalised remittance scheme) limits, although this cannot be the intent for matters such as inheritance. With these new rules, at least basic transactions can happen smoothly. The introduction of language that allows residents to invest in foreign entities with holding in India subject to conditions, also alleviates some concern around roundtripping.”

The other aspect addressed pertains to the acquisition of foreign securities by way of inheritance or gift. You may inherit such securities from any person resident in India and you may be gifted such securities by a person resident in India provided they are classified as being a relative. You can also receive it as inheritance or gift from a person residing outside India within the provisions of the Foreign Contribution Regulation Act.

This clarity was missing in earlier versions of the regulations and currently, the regulations have not stated any transaction limit on the acquisition of foreign securities through this route.

How do you benefit?

According to Rishi Anand, a partner at DSK Legal, “The recently notified ODI Rules, 2022, endeavour to simplify and bring clarity on several aspects of the erstwhile framework on overseas investments. May it be introducing new definitions of ODI and OPI, easing roundtripping transactions subject to sufficient safeguards, or setting norms for resident individuals to make investments overseas. The new rules have been welcomed as a positive step by individuals willing to invest in the foreign market and proposing to become a part of the global value chain.”

In other words, there is a broadening of entitlement under these provisions for individual resident Indians looking for relevant investment opportunities overseas. For entities impacted by mergers and acquisitions or founders who want to set up shop, there is a clear framework to begin with.

According to Praveen Raju, a partner at Spice Route Legal, “The new regulations allow significant ability for Indian businesses and founders in creating offshore entities, expanding globally and enhancing funding opportunities, while retaining core operations and employment in India. The relaxations including those relating to stepdown subsidiaries, portfolio investments, control, stock options and other equity incentives, pave a path for lesser regulatory intervention on participation by resident founders, investors and employees in global companies that have a base in India.”

Overall, the recent regulations seem to bring a sigh of relief and much-needed clarity for standard transactions. This, consequently, will open the gates for more foreign investment activity by resident individuals seeking opportunities in overseas markets.