Regulatory Realignment: Ensuring Compliance in Reshaping Overseas Investments by Resident Individuals

The framework for overseas investments by individuals is governed by “Foreign Exchange Management (Overseas Investment) Rules 2022”, “Foreign Exchange Management (Overseas Investment) Regulations 2022” read with “Foreign Exchange Management (Overseas Investment) Directions 2022”, as issued and amended from time to time (collectively referred to as “ODI Framework” or “Existing ODI Framework”). This ODI Framework has been issued in supersession of eighteen years old regulations - Foreign Exchange Management (Transfer or issue of Foreign Security) Regulations, 2004 read with Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (collectively referred to as “Old ODI Framework”)

?The ODI Framework outlines the statutory provisions and procedures for individuals desiring to invest in securities abroad. These provisions address aspects such as the permissible amount and mode of investment, reporting requirements, valuation mandate, disinvestments, write-off,s and other significant guidelines requiring strict adherence thereof, which are crucial for ensuring legal compliance at all times.

?To understand the legal implications associated with the investments made by resident individuals, a comparative analysis of the ODI Framework and Old ODI Framework is imperative, especially in cases where the routing of funds is an inherent risk.

?In order to curb the scenarios involving the aforesaid risks, the latest framework prohibits the holding of any step-down subsidiary by the foreign entity where the resident individual has ‘control’. Unlike the old framework, the prevailing statutory provisions governing overseas investments have defined the term ‘control’ more comprehensively, encompassing the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten percent or more of voting rights or in any other manner in the entity. However, under the Old ODI Framework, the resident individual, irrespective of the percentage of his investment with or without control, was under the statutory obligation to ensure that the foreign entity where he has made the investment, does not acquire or invest in any step-down subsidiary.

?Thus, it may be unambiguously inferred that the ODI framework has liberalised the holding of the step-down subsidiary by the foreign entity to some extent, as compared to its predecessor framework, as it allows for a broader range of factors to determine control. This approach indicates a certain degree of flexibility in allowing foreign entities to hold step-down subsidiaries, provided that control is not vested in resident individuals.A more detailed case-specific analysis is detailed with the help of following diagrammatic chart, providing for its permissibility under the prevailing and erstwhile framework:

PERMISSIBILITY UNDER THE OLD ODI FRAMEWORK

PERMISSIBILITY UNDER THE EXISTING ODI FRAMEWORK

?Note – The reference to shareholding of 10% by resident Indian individual refers to his voting rights as well in the foreign entity

As per the existing ODI framework, the term ‘subsidiary’ or ‘step down subsidiary’ of a foreign entity means an entity in which the foreign entity has ‘control’. The term ‘control’ means the right to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten % or more of voting rights or in any other manner in the entity.

The non-permitted structures can be regularised and structured in the following manner:

CASE-1 The structure was not permitted as per the Old ODI Framework, but permitted as per the Existing ODI Framework

1.?????? Regularization by obtaining post facto approval from RBI;

2.?????? Undertaking of required compliances including the valuation requirements and submission of statutory reportings, wherever applicable;

3.?????? Compounding of transactions before the RBI.

CASE-2 The structure is not permitted as on date under both the framework

1.?????? Approval from RBI to unwind the structure;

2.?????? Implementation of the RBI directives;

3.?????? Undertaking of required compliances including the valuation requirements and submission of statutory reportings, wherever applicable;

4.?????? Compounding of transactions before the RBI.

?Thus, to ensure adherence to statutory norms, it is advisable to regularize the structure in accordance with the prevailing legal framework. This involves conducting a thorough review of the current structure to identify any areas of non-compliance, engaging legal and compliance experts to develop a compliance roadmap, implementing necessary changes and submission of necessary documentation/ application before AD Bank/ RBI. By aligning the structure with regulatory requirements and continuously monitoring for compliance, the resident individuals will be able to mitigate legal risks and operate within the bounds of the law.

Authors: | Abhishek Bansal ,Partner ([email protected])| Laxmi Sinha , Principal Associate ([email protected]) | ACUMEN JURIS,?Law Office?(DELHI | GURUGRAM | BENGALURU | NOIDA)

Practice Areas: Mergers & Acquisitions | Transaction Advisory | Corporate Commercial | Startup Advisory | Forensic Due Diligence | Global Business Setup

Phone: 0124-4239845 |?Email:?[email protected]?|?Website:?www.acumenjuris.com

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