India widens overseas investment options for high net-worth individuals

Overseas Investment Regulations notified by the Reserve Bank of India on 22 August have opened new avenues for investment by HNIs outside India, and go beyond the much talked about ODI-FDI (overseas direct investment-foreign direct investment) structure relaxation. Business families in India have been setting up family offices as part of their estate and succession planning. The new regulations facilitate family offices to invest overseas.

Family offices always found it difficult to set up holding company/fund structures overseas due to the erstwhile ODI regulations which required such entities to be necessarily approved by a regulatory authority in the host country. Most developed economies (which were the jurisdiction of choice for setting up such holding company /fund) did not regulate such entities as they were using their own funds. As per new regulations, an approval is essential only if required under the host country’s laws.

Further, a family office should now be able to set up a fund overseas, through its operating entity also, because under the new regulations, an Indian Entity (IE) which is not engaged in Financial Services (FS) activities is now allowed to make ODI in an entity engaged in FS (except banking and insurance) activities.

Resident Individuals (RI) can purchase a house outside India out of the remittance under the Liberalised Remittance Scheme or LRS (i.e. $250,000 per annum). Practically, an RI has to pool remittances from other family members in order to acquire the house. Earlier, in such cases, the property was required to be jointly owned by all family members who have made the remittance. This created practical difficulties for HNIs to acquire their coveted overseas home. Under the new regulations, an RI can simply consolidate LRS remittances made by resident relatives to acquire a house outside India.

Under the erstwhile regulations, RIs were allowed to make ODI in a foreign entity, however, Overseas Portfolio Investments (OPI) was not clearly spelled out. The new regulations have drawn a clear line of demarcation between ODI and OPI. Investment, wherein less than 10% paid-up capital and/or voting rights is acquired, by an RI in a listed entity is automatically classified as an OPI. Further, acquisition of shares under ESOP scheme resulting in acquisition of less than 10% of equity capital of a listed/unlisted foreign entity without control shall also be classified as an OPI. It may be noted that OPI is not subject to sectoral restrictions and, therefore unlike ODI, it can be in sectors such as real estate, gambling and specified financial products.

It may be noted that acquisition of shares through ESOP scheme have been specifically carved out of the LRS limit and hence remittance without any limit can be made by an RI on these accounts.

However, remittances made for such ESOP shall go on to reduce the LRS limit of that year. So ostensibly, you can make a remittance of say $1 million for exercising an ESOP, but you would not even be able to travel overseas in that year, as you would have exhausted your LRS limit. The regulations however do not seem to suggest a roll-forward of the excess remittance, hence the LRS limit of $250,000 should get restored in the next financial year.

For an IE, limit of ODI and OPI remains at 400% and 50% respectively of its net worth—the definition of net worth has now become empirical. Net worth was earlier defined as share capital and free reserve and did not include securities premium. The incongruity has now been removed. Now, unambiguously, limits of ODI and OPI shall be reckoned based on the ‘real’ net worth (as defined under Companies Act which includes securities premium) of a company, which would in most cases enhance the limit of overseas investments.

The government has been progressively rationalizing provisions of the Foreign Exchange Management Act. Taking a pragmatic approach, the government has clarified certain key issues under the existing ODI framework as well. The new regulations should promote overseas investment and should expand the sphere of influence of Indian entrepreneurs globally.

Vishwas Panjiar is partner at Nangia Andersen LLP. Shubham Jain, manager, Nangia Andersen LLP, contributed to this article.