The Foreign Exchange Department (“FED”) of the Reserve Bank of India (“RBI”) vide notification dated August 22, 2022, has notified the Foreign Exchange Management (Overseas Investment) Regulation, 2022 (“OI Regulation”) and the Central Government vide notification dated August 22, 2022, has notified the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”) superseding the existing regulations pertaining to Overseas Investment (“OI”) by resident Indians and entities incorporated in India i.e., the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.
Wherever the context requires “OI Rules” and “OI Regulations” are hereinafter collectively referred to as “OI Regime”. Further, any capitalized term not defined herein below shall be interpreted in its general parlance in relation to the subject matter.
The framework of legislation under OI Rules and OI Regulations has been revised to promote ease in doing business by simplifying the procedures and rationalizing the rules and regulations. The OI Regime simplifies the existing framework by reducing the need to seek specific approvals and thereby minimizing the compliance obligation and related costs on the investors.
The Highlights of the OI Regime are:
1. Introduction of “Strategic Sector”
The OI Rules define the term strategic sector to mean and include energy and natural resources sectors such as oil, gas, coal, mineral, ores, etc., start-ups, and other sectors as the government may deem fit.
2. Approval from the Central Government
OI/ financial commitment by any Indian entity in Pakistan or strategic sectors/ specific geographies would require prior approval from the Central Government.
3. Approval for OI from RBI
Any financial commitment exceeding USD 1,000,000,000 (United States Dollar One Billion) by an Indian entity in a financial year would require prior approval from RBI.
4. Modes of Financial Commitments
As per the OI Regulation, an Indian entity can make a financial commitment in an overseas entity by (i) lending or investing in debt instruments; (ii) investing in equity capital of any foreign listed and non-listed entity; (iii) issuance of guarantee on behalf of the foreign entity in which such Indian has acquired control; (iv) pledge of shares of the foreign entity in which the Indian entity has made.
5. Mode of Payment
The OI Regulation provides various modes of payment for OI such as (i) by remittance through banking channels; (ii) from funds held in account maintained Indian/ overseas as per provisions of the Foreign Exchange Management Act, 1999; (iii) swap of securities; (iv) using proceeds of ADR and GDR, stock swap, receipts of ECB and financial commitment by way of debt.
6. Pricing Guidelines
Any investment made by an Indian entity in a foreign entity by way of transfer or acquisition of equity shares shall be subject to price arrived at an arm’s length basis.
Every investor undertaking an OI/ financial commitment shall report the same to RBI through AD Bank within the timelines prescribed under the OI Regulation. The investor is also required to file an Annual Performance Report as an annual compliance towards the OI.
8. Delay in reporting
The OI Regime has introduced the concept of delayed filing for completion of compliance by making late submission fees as may be provided by RBI. However, such delayed filings can only be done within a maximum period of 3 (three) years from the due date of submission/ filing.
The RBI has also notified the Foreign Exchange Management (Overseas Investment) Directions, 2022 (“OI Directions”) vide its AP (DIR Series) Circular No.12 dated August 22, 2022, consolidating and simplifying the directions pertaining to OI Rules and OI Regulations.