On 22 August, the Ministry of Finance, in consultation with the Reserve Bank of India, took an important step relating to the operationalization of a new foreign investment regime. This article covers the provisions of the new foreign investment framework.
As per Exchange Control Regulations, a resident individual can remit abroad up to $250,000 per financial year for any permitted capital and current account transactions or a combination of both under the Liberalized Remittance Scheme (LRS). Capital account transactions include purchase of shares, mutual funds, etc., while current account transactions include medical expenses, personal visits, gifts, donations, etc.
Investments made abroad can be in the form of Foreign Direct Investment (ODI) or Foreign Portfolio Investment (OPI). The new framework defines ODI as investment in the form of acquisition of unlisted equity capital of a foreign entity or subscription to the memorandum of a foreign entity or investment in 10% or more of the paid-up equity capital of a listed foreign entity. It is to be noted that even 1% investment in an unlisted company will now constitute an ODI under the new rules. Where the investment is less than 10% of the paid-up equity capital of a listed foreign entity, such investment along with control (having more than 10% voting power) will also be covered under ODI.
OPI is defined as investment in foreign securities that does not constitute ODI and does not include investment in any unlisted debt instrument. Further, acquisition of sweat equity shares, minimum qualification shares and ESOPs (employee stock options) of less than 10% of equity capital without control in a listed or unlisted foreign entity will be treated as OPI.
A resident individual may invest only in an operating foreign entity (without investment in a subsidiary) that is not engaged in financial service activity. In order to provide the exemption, a carve-out has been made to allow the foreign entity to have a step-down subsidiary when it does not have control.
A foreign entity shall be deemed to be engaged in the business of financial services activity if it carries on an activity which, if undertaken by an entity in India, would require registration with or be regulated by a financial sector regulator in India Is. Further, the above condition will not be applicable if the ODI is created by way of inheritance, sweat equity shares, minimum qualifying shares, ESOPs.
A resident individual is not permitted to make ODI with a foreign entity engaged in real estate activity, gambling and financial products denominated in Indian Rupee.
As per the new rules, if a resident individual intends to make ODIs in start-ups recognized under the laws of the host country, such investment shall be made only from such individual’s own funds and not from borrowed funds. The investment shall be made only in an entity which is engaged in a bona fide business having permissible business activity under any law in force in India and the host country, as the case may be.
Another important amendment is on gift of shares. Now, a resident individual can receive foreign securities by way of gift from a relative resident in India. The investor can also acquire foreign securities from a person resident outside India, provided it is in accordance with the Foreign Contribution Regulation Act, 2010. The regulations also clarify that resident individuals are not permitted to transfer any foreign investment by way of gift to a resident individual. outside India.
A resident individual can approach his banker for any foreign investment. For capital account transactions, the individual will be required to provide Form A2, Form FC and other supporting documents as may be required by the banker. The share certificate issued by the company should also be submitted to the banker.
If the investment is less than 10% and is without control then the person will not be required to file Annual Performance Report annually.
With significant relaxations and increased clarity, the new foreign investment framework has definitely opened up avenues for individuals to invest abroad. There are some gray areas which need to be clarified through FAQs (Frequently Asked Questions). It is advisable to talk to bankers and get their views before going ahead with any investment.
Mukesh Kumar, Swetha A and Abhishek are Partners, Senior Manager and Senior Associate respectively at M2K Advisors LLP.
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