Applicability of Overseas Direct Investment or ODI Rules
The revisions in the Overseas Direct Investment (ODI) Guidelines have brought about notable changes regarding the scope of overseas investments by resident individuals which will be completely applicable to our case. These modifications have expanded the possibilities for resident individuals to engage in overseas investments under specific conditions.[1]
?? ODI in a foreign entity with a stepdown subsidiary is now permissible for a resident individual, provided the resident individual does not exercise control over the foreign entity.
?? The guidelines specify that any acquisition of foreign securities by resident individuals through inheritance is permitted without any restrictions under the Liberalised Remittance Scheme (LRS). However, acquisitions through employee stock options will be accounted for within the LRS limit of the individual in question. This distinction aims to provide clarity on the treatment of different sources of acquisition and their impact on the LRS limits.[2]
The guidelines also allow resident individuals to acquire foreign securities by way of a gift from another resident individual, without any limitations under the LRS, provided that the resident individual gifting the securities is a relative and is compliant with the regulations stipulated by the Foreign Exchange Management Act (FEMA). This provision facilitates the transfer of foreign securities between resident individuals who are relatives, with the aim of promoting flexibility and ease of transactions within certain familial contexts.[3]
However, recent developments have led to the replacement of the concept of JV/WOS (Joint Ventures/ Wholly Owned Subsidiaries) with the broader term 'foreign entity.' This new term encompasses entities that are formed, registered, or incorporated outside India, including those operating within the International Financial Service Centre (IFSC) in India, with limited liability. It's important to note that the requirement of limited liability for the foreign entity is waived for those engaged in core activities within strategic sectors. The term 'strategic sectors' typically includes critical industries such as energy and natural resources (e.g., oil, gas, coal, mineral ores, submarine cable systems), as well as startups, and any other sector deemed essential by the Central Government. Consequently, Indian entities are now allowed to invest in unincorporated entities within strategic sectors overseas, subject to fulfilling other regulatory requirements.[4]
The concept of "control" in the context of business and corporate governance refers to the power or authority to direct the management and policies of an entity. In the context of the Overseas Direct Investment (ODI) Guidelines, the definition of "control" has been broadened to include several elements beyond the traditional notion of majority shareholding or directorial control.
Under the updated ODI Guidelines, even a 10% (ten percent) shareholding in an entity can be considered as constituting "control." This means that having a shareholding of 10% or more in a company can potentially provide an Indian entity with significant influence over the decision-making processes and management of the foreign entity. Moreover, in addition to shareholding, the right to appoint a majority of directors and the ability to exercise control over management and policy decisions are also crucial indicators of control. These elements collectively contribute to the overall assessment of whether an entity has control over another entity, even if the shareholding is less than 10%.[5]
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Schedule II
Manner of making Overseas Portfolio Investment by an Indian entity
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?? According to the rules, an Indian entity is allowed to make Overseas Portfolio Investment, subject to certain limitations. One key limitation is that the investment should not exceed fifty percent of the entity's net worth as of the date of its last audited balance sheet. This limit is imposed to ensure that Indian entities do not overextend themselves in foreign investments and maintain a balanced approach in their financial activities.
?? The rules permit listed Indian companies to engage in Overseas Portfolio Investment, including through reinvestment. This provision allows established Indian companies that are listed on stock exchanges to expand their investment activities beyond the domestic market. Such provisions can help these companies diversify their investment portfolios and potentially benefit from international market opportunities, thus contributing to their growth and profitability.
?? The rules specify that unlisted Indian entities can make Overseas Portfolio Investments under specific conditions. There are restrictions and limitations placed on unlisted entities regarding their ability to invest overseas. These restrictions are likely to be in place to safeguard the interests of unlisted entities and prevent them from taking excessive risks that could potentially jeopardize their financial stability.
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