NEW DELHI: In a significant move, the new overseas direct investment rules have permitted outbound investments, classified as ‘round-tripping’ under the earlier regime (FDI-ODI structures), without requiring prior RBI approval if the structure involves less than two layers of subsidiaries.
The relaxation is expected to boost overseas deal-making by Indian entities, say experts.
“As per the rules, an Indian entity or an Indian resident individual can hold less than 10 per cent equity in an overseas entity, holds investment(s) in India up to two layers of subsidiaries, directly or indirectly,” Hemal Mehta, Partner, Deloitte India said.
“Holding less than 10 per cent equity in an overseas entity is inter-alia not considered as a ‘control’ but is classified under ‘portfolio investment’. On a separate note, determining an arm’s length pricing on issue/transfer of the capital of foreign entity may impose some practical challenges considering the obligation is now shifted to AD banks,” Mehta added.
As per Badri Narayanan, executive partner, Lakshmikumaran & Sridharan Attorneys, the government has been receptive to the feedback from industry and stakeholders on the draft regulations that were released for comments last year and some of the key issues that were flagged have been addressed in the final notified overseas investment rules/regulations.
"The new Rules have included a requirement of obtaining a no-objection certificate ("NOC") where the person has a NPA account or is classified as a wilful defaulter by any bank or is under investigation by a financial service regulator or CBI/ ED/ SFIO, before making any investment or divestment under the rules. While this is to ensure that the investigation/ enforcement process in India is not adversely affected by remitting funds/ assets outside India, the Rules also provide a deeming provision where the NOC is deemed to be provided if the concerned authority does not respond within 60 days of the request," Narayanan said.
"It will have to be seen whether such requirement to obtain NOC is applicable to the entire ‘group’ if a group company or an affiliate gets covered under this provision. The Rules also provide that any ODI in start-ups recognised under the laws of the foreign country or foreign jurisdiction shall be made by an Indian entity only from the internal accruals whether from the Indian entity or group or associate companies in India, and in case of resident individuals, from own funds of such an individual," he further stated.
"While the Regulations provide significant clarity on debt related overseas investment, they also impose comparatively stricter conditions on Indian entities undertaking financial commitments on behalf of a foreign entity. The Regulations stipulate that such commitment may be provided only if the Indian entity has made an equity investment in the foreign entity and acquired control," said Gaurav Dayal, Partner, Lakshmikumaran & Sridharan Attorneys.
Utkarsh Sinha,managing director at Bexley Advisors, a boutique investment bank firm said, the recent relaxations in overseas direct investment (ODI) norms by the RBI and Finance Ministry signals a greater confidence in the country's management of foreign outflows.