Facilitating Overseas investments - New Regime with some tweak

India is open and welcoming for foreign investors, being one of the most attractive FDI destinations – at the same time, it also reciprocity in terms of encouraging Indian investors to make investments in foreign territories, to tap the potential lying there.

Accordingly, to make the legal framework pertaining to foreign investments by Indians friendlier to Indian Investors, the Central government has issued a new set of guidelines under the Rules (framed by Central Government), Regulations and Directions (issued by RBI) – inter alia, by widening doors to make foreign investments in shares, immovable properties etc.

Some prominent changes introduced by said Rules are as follows:

Mode of investments: Typically, India investors are permitted to make investments in foreign assets via two modes (Overseas Direct Investment ODI or Overseas Portfolio Investment OPI). One of major backdrop until now was the absence of a clear criteria to mark the distinction between compliance requirements of OPI and ODI – Absence of such demarcation often threw Indian investors in dilemma as to which set of rules they have to comply with.

To put an end to this dilemma, the central government has introduced new criteria for ODI and OPI:

ODI:

ODI transaction means any transaction with involvement of individual/entities:

a) via equity investment, with or without control, even threshold percentage less than 10%.

b) with investment in a listed foreign company above or below 10% stake with control.

OPI on the other hand means investment in foreign securities that is not ODI and excludes investment in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC. The classification is relevant as Schedule I and II to the ODI Rules provides for the manner in which an Indian entity can make ODI and OPI.

Compliance requirements with ODI:

?ODI investments require individuals to file:

a)???Newly introduced Form FC ?- This needs to be filed with Authorized Bank before making investment with relevant details.

b)???Annual filing of Annual Performance Report (APR) in the Form APR – This needs to be filed with Authorized Bank annually on or before 31 December with relevant financial details.

No subscription:

Subscription to unlisted government debt securities/bonds, by retail investors under ODI and OPI regulations is not permitted under new rules.

Investments through IFSC:

New rules will be applicable to investments made by resident Indian investor in entities located in IFSC (GIFT City in Gujarat).

Under new rules, investments in foreign stocks can be made via international exchange established in IFSC by Indian retail investors under the Liberalized Remittance Scheme (LRS) limits.

Annual performance report:?Resident Indian with ownership of less than 10% equity capital in foreign entity with no control and no financial commitments (excluding equity investment contribution) is not required to file Annual Performance Report.

Penalty:??Another interesting aspect is that any delay in filings of certain mandatory statutory forms with a lapse period of upto three years can be regularized with payment of late submission fees. The underlying intent is to provide defaulters with an opportunity to rectify default with payment of fees which will be instrument in cutting down probability of long litigation battle between authorities and defaulters and reducing significantly requirements of resorting to litigation.

Under the old process, delay in statutory filings would force Indian retail investors to pay penalty as imposed by RBI to regularize lapse in delay of statutory filings.

Timelines for compliance:

No change in timelines for compliance with applicable regulatory requirements. Another interesting addition is inception of compliance requirements for OPI investment by Reserve Bank of India.

Acquisition of new properties:

Under new rules, Resident Indian has the leverage to acquire property overseas from the income earned out of property acquired overseas under OPI or income from immovable properties owned overseas – This is not case with old regulations.

Gift of foreign securities

Under new rules, acquisition of foreign securities as a gift from Indian Resident to another Indian resident is permitted without limitation, provided:

(a)???????????person granting gift is a relative to the receiver of gift and

(b)???????????person granting gift will be holding such foreign securities in accordance with the provisions of FEMA

However, this new ruling comes with a catch, as gifts to any resident Indian from Indian resident friends or any other relative that are not defined under the Companies Act is not permitted.

Interestingly, under old guard, acquisition of foreign securities as only a gift by a Resident Indian from a non-resident, Person of Indian origin (PIO) or Overseas Cardholder Indian (OCI) was permitted.

Joint Property:

Under new rules, Resident Indian is permitted to own a property jointly with a non-resident Indian relative including with a provision of remittance of investment from India for purchase of joint property to a tune of (USD 2.5 lakh). Definition of Relative provided in Companies Act is the basis for application of this ruling.

Under old regime, such joint acquisition of property by resident Indian and non-resident India relative is permitted only if there is no remission of investment money from India by resident Indian.?

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