What new norms for overseas investment imply

As per exchange control regulations, a resident individual may 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). The capital account transactions include purchase of shares, mutual funds, etc., while current account transactions include medical expenditure, private visits, gifts, donations, etc.

The investments made overseas can be in the form of Overseas Direct Investment (ODI) or Overseas Portfolio Investment (OPI). The new framework defines ODI as investment by way 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 would now constitute an ODI under the new regulations. Where investment is less than 10% of the paid-up equity capital of a listed foreign entity, such investment with control (holding more than 10% voting power) would 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 instruments. Further, any acquisition of sweat equity shares, minimum qualification shares and ESOPs (employee stock options) of less than 10% of equity capital in a listed or unlisted foreign entity without control shall be treated as OPI.

A resident individual can make investment only in an operating foreign entity (without investment in subsidiary) not engaged in financial services activity. To provide relaxation, a carve-out has been made to permit foreign entity to have a step-down subsidiary if there is no control.

A foreign entity will be considered to be engaged in the business of financial services activity if it undertakes an activity, which if carried out by an entity in India, requires registration with or is regulated by a financial sector regulator in India. Further, the aforesaid condition shall not apply if ODI is made by way of inheritance, sweat equity shares, minimum qualification shares, ESOPs.

No resident individual is allowed to make ODI in a foreign entity engaged in real estate activity, gambling and financial products linked to the Indian rupee.

As per the new regulations, if a resident individual intends to make ODI in start-ups recognized under the laws of the host country, such investment shall be only out of own funds of such an individual and not borrowed funds. The investment shall be made only in an entity which is engaged in bona fide business having a business activity permissible under any law in force in India and the host country, as the case may be.

Another key amendment is on gift of shares. Now, a resident individual can acquire foreign securities by way of gift from a person resident in India who is a relative. The investor can also acquire foreign securities from a person resident outside India provided it is in accordance with Foreign Contribution Regulation Act, 2010. The regulations have also clarified that resident individuals are not permitted to transfer any overseas investment by way of gift to a person residing outside India.

A resident individual can approach their banker for any overseas investment. For a capital account transaction, the individual would be required to provide Form A2, Form FC and other supporting documents which the banker may require. The share certificates issued by the company should also be submitted to the banker.

The individual would not be required to file the Form Annual Performance Report yearly if the investment is less than 10% and is without control.

With significant relaxations and enhanced clarity, the new overseas investment framework has certainly opened avenues for individuals to invest abroad. There are certain grey areas which need to be clarified through FAQs (frequently asked questions). It is advisable to interact with bankers and obtain their views before proceeding with any investments.

Mukesh Kumar, Swetha A, and Abishek are partner, senior manager and senior associate, respectively, at M2K Advisors LLP.