This should help Indian businesses take and manage overseas exposure
The Union government on Monday, in consultation with the Reserve Bank of India (RBI), strengthened overseas investment rules for Indian entities to impart greater clarity and improve the ease of doing business. As Indian businesses integrate with the global economy, clear rules of engagement would help. Since India doesn’t have full convertibility on the capital account, it is important for the government and the RBI to monitor overseas transactions by Indian entities because of their wider implications for currency management and financial stability. With improvement in macroeconomic fundamentals over time, the policy establishment has made it easier for Indian entities to acquire businesses and other assets abroad. The revision in the regulatory framework is an extension of this process and is aimed at bringing clarity to enable Indian businesses to integrate with the global value chain.
The new rules, for instance, make a clear distinction between direct and portfolio investment and put in place clear guidelines. An Indian entity can make overseas direct investment (ODI) by taking an equity stake in a bona fide business through various possible means, including subscription as part of the memorandum of association, bidding or tendering, merger, or any scheme of arrangement in accordance with the law applicable in India or the host country. Further, entities engaged in financial services in India can make ODI in a foreign entity directly or indirectly engaged in financial services, subject to certain conditions. An Indian entity not engaged in financial services can also make an ODI in a foreign entity engaged in financial services, except in banking and insurance with certain conditions. Also, the commitment by an Indian entity in all foreign entities put together should not exceed 400 per cent of its net worth, or as directed by the RBI over time. In the case of overseas portfolio investment (OPI), it should not exceed 50 per cent of net worth.
For individuals making an ODI or OPI, the limit would be subject to the liberalised remittance scheme of the RBI. However, an individual can acquire foreign securities without any limits by way of inheritance from a person resident in India. Mutual funds, venture capital funds, and alternative investment funds can invest in foreign securities as stipulated by the Securities and Exchange Board of India. In this context, there is a strong case for the securities market regulator to review the current ceiling for mutual funds. The rules, however, prohibit Indians from investing in foreign entities engaged in real estate activity, gambling, or dealing with products linked to the Indian rupee without the RBI’s permission. Besides, Indians are not expected to make a commitment in a foreign entity that invests in India or has invested in India, resulting in a structure of subsidiaries of more than two layers.
The RBI has also issued overseas investment regulations with detailed reporting requirements and obligations for Indian residents. In case residents are not able to make the necessary disclosures in the given timeframe, they can file them with a late submission fee as prescribed by the RBI. Overall, notifications issued by the government and the RBI describe in detail what Indian entities can do and the kind of commitment they can make in overseas entities, both in terms of direct and portfolio investment. This should help Indian businesses take and manage overseas exposure.