I. Introduction
A. Overview of the Foreign Exchange Management (Overseas Investment) Regulations, 2022
The Reserve Bank of India (RBI) has released the Foreign Exchange Management (Overseas Investment) Regulations, 2022 which provide guidelines for Indian entities looking to make overseas investments. These regulations aim to ensure compliance with the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Overseas Investment) Rules, 2022, and provide a framework for Indian entities to make overseas investments.
B. Importance of understanding the regulations for Indian entities making overseas investments
It is important for Indian entities to understand these regulations as they provide guidelines and regulations for making overseas investments, including investment in debt instruments, extending non-fund based commitments, and providing guarantees to foreign entities. Additionally, the regulations also impose certain obligations and reporting requirements on Indian entities making such investments, which must be complied with in order to avoid any legal issues.
II. Eligibility for Overseas Direct Investment (ODI)
A. Conditions for lending or investing in debt instruments issued by foreign entities
Indian entities are eligible to lend or invest in any debt instruments issued by foreign entities subject to the condition that they have acquired control of the foreign entity at the time of making the investment and the investment falls within the financial commitment limit as prescribed by the Foreign Exchange Management (Overseas Investment) Rules, 2022.
B. Acquiring control of the foreign entity at the time of making the investment
Indian entities must have acquired control of the foreign entity at the time of making the investment in order to be eligible to lend or invest in its debt instruments. This is to ensure that the Indian entity has a significant stake in the foreign entity and can exercise control over its operations.
C. Financial commitment limit as prescribed by the Foreign Exchange Management (Overseas Investment) Rules, 2022
There is a financial commitment limit as prescribed by the Foreign Exchange Management (Overseas Investment) Rules, 2022 for Indian entities making overseas investments. This limit must be adhered to in order for the investment to be considered eligible.
III. Providing guarantees to foreign entities
A. Types of guarantees that can be issued
Indian entities can issue a variety of guarantees to foreign entities or their step-down subsidiaries in which the Indian entity has acquired control. These include corporate or performance guarantees from the Indian entity or its group companies, personal guarantees from the resident individual promoter of the Indian entity, or bank guarantees backed by a counter-guarantee or collateral from the Indian entity or its group companies.
B. Financial commitment limit for guarantees
The financial commitment limit referred to in the Foreign Exchange Management (Overseas Investment) Rules, 2022 applies to guarantees as well. Indian entities must ensure that the guarantees they provide do not exceed this limit.
C. Utilization of financial commitment limit for group companies and individual promoters
Where the guarantee is extended by a group company, it shall be counted towards the utilization of its financial commitment limit independently and in case of a resident individual promoter, the same shall be counted towards the financial commitment limit of the Indian entity.
IV. Mode of payment
A. Payment through banking channels
Indian entities can make payment for overseas investments through banking channels, using regular wire transfer or other approved banking methods.
B. Payment from funds held in an account in accordance with the Foreign Exchange Management Act, 1999
Indian entities can also make payment for overseas investments from funds held in an account in accordance with the Foreign Exchange Management Act, 1999.
C. Payment by swap of securities
Indian entities can make payment for overseas investments by swapping securities with the foreign entity. This means that the Indian entity would transfer its securities to the foreign entity in exchange for the foreign entity's securities.
D. Payment by using proceeds of American Depository Receipts or Global Depositary Receipts
Indian entities can make payment for overseas investments by using the proceeds of American Depository Receipts (ADRs) or Global Depositary Receipts (GDRs) that they have received. ADRs and GDRs are financial instruments that allow investors to trade shares of foreign companies on domestic stock exchanges.
V. Obligations of Indian entities
A. Submission of share certificates or other relevant documents
Indian entities acquiring equity capital in a foreign entity, which is considered as ODI, must submit share certificates or other relevant documents as per the laws of the host country or jurisdiction as evidence of such investment within six months from the date of effecting remittance or the date on which the dues to such person are capitalized or the date on which the amount due was allowed to be capitalized, as the case may be.
B. Obtaining a Unique Identification Number (UIN)
Indian entities making ODI must obtain a Unique Identification Number (UIN) from the Reserve Bank for the foreign entity in which the ODI is intended to be made, before sending outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier.
C. Routing transactions through a designated Authorized Dealer (AD) bank
Indian entities making ODI must route all transactions relating to a particular UIN through the AD bank designated for that UIN. This is to ensure that all transactions are properly recorded and tracked.
D. Repatriation of dues and assets
Indian entities having ODI in a foreign entity, wherever applicable, shall realize and repatriate to India, all dues receivable from the foreign entity with respect to investment in such foreign entity, the amount of consideration received on account of transfer or disinvestment of such ODI and the net realizable value of the assets on account of the liquidation of the foreign entity as per the laws of the host country or the host jurisdiction, as the case may be, within ninety days from the date when such receivables fall due or the date of such transfer or disinvestment or the date of the actual distribution of assets made by the official liquidator.
E. Remittance towards earnest money deposit
Indian entities that are eligible to make ODI may make remittance towards earnest money deposit or obtain a bid bond guarantee from an AD bank for participation in bidding or tender procedure for the acquisition of a foreign entity.
VI. Reporting requirements
A. Reporting financial commitments, disinvestment, and restructuring
Indian entities making ODI or making financial commitment or undertaking disinvestment in a foreign entity shall report the following, namely: financial commitment, whether it is reckoned towards the financial commitment limit or not, at the time of sending outward remittance or making a financial commitment, whichever is earlier; disinvestment within thirty days of receipt of disinvestment proceeds; restructuring within thirty days from the date of such restructuring.
B. Reporting Overseas Portfolio Investment (OPI) and transfer of such investment
Indian entities other than a resident individual making any Overseas Portfolio Investment (OPI) or transferring such OPI by way of sale shall report such investment or transfer of investment within sixty days from the date of such investment or transfer.
VII. Conclusion
A. Summary of key takeaways
These regulations provide a framework for Indian entities to make overseas investments, including investment in debt instruments, extending non-fund based commitments, and providing guarantees to foreign entities. The regulations also impose certain obligations and reporting requirements on Indian entities making such investments, which must be complied with in order to avoid any legal issues.
B. Emphasis on compliance and adherence to regulations
It is important for Indian entities to understand and comply with these regulations in order to ensure that their overseas investments are made in a legal and compliant manner. Adhering to the financial commitment limit, obtaining a UIN, routing transactions through a designated AD bank, and reporting financial commitments, disinvestment, and restructuring are some of the key compliance requirements that Indian entities must adhere to.
C. Importance of seeking professional advice
Indian entities should seek professional advice in order to understand and comply with these regulations as it may be a complex task to navigate through the regulations. Additionally, it is important to stay updated with any changes or modifications that may be made to the regulations in the future.