With a view to liberalise and simplify the regulatory framework on overseas investments and to promote ease of doing business, the Central Government has issued the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“ODI Rules”). The Reserve Bank of India (“RBI”) has also simultaneously issued the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“ODI Regulations”) and the Foreign Exchange Management (Overseas Investment) Directions, 2022 (“ODI Directions”, which together with the ODI Rules and the ODI Regulations, are referred as “ODI Guidelines”). We set out below are a few key changes brought about under the ODI Guidelines:

1. Concept of JV/WOS substituted by ‘foreign entity’: The erstwhile Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (“FEMA 120”) permitted Indian parties to extend loan or a guarantee to or on behalf of the Joint Venture (“JV”)/Wholly Owned Subsidiary (“WOS”) abroad. Under the ODI Guidelines: The concept of a JV/WOS under the ODI has been substituted with the concept of a ‘foreign entity’, which is an entity formed or registered or incorporated outside India, including in the International Financial Service Centre (“IFSC”) in India, that has limited liability. Note that the requirement of limited liability for the foreign entity does not apply to a foreign entity with core activity in a strategic sector (i.e. sectors including energy and natural resources sectors such as oil, gas, coal, mineral ores, submarine cable system and start-ups and any other sector as deemed necessary by the Central Government. Subject to other compliances, ODI in strategic sectors can therefore also be made in unincorporated entities. Further, a foreign entity may be an investment fund / vehicle, regulated by the financial sector regulator of the host jurisdiction and set up as a trust outside India, in which case the liability of the person resident in India shall be clear and limited not exceeding the interest or contribution in the fund. The trustee of such fund shall be a person resident outside India. The ODI Guidelines therefore also provide for ODI investments in such investment funds / trusts.
2. Eligibility for ODI other than through equity capital: While ODI in equity is separately provided for, interestingly under the new ODI Guidelines, an Indian entity may lend or invest in any debt instrument issued by a foreign entity or extend non-fund based commitment to or on behalf of a foreign entity (including its overseas step down subsidiaries) where it (i) is eligible to make ODI (ii) has made ODI in the foreign entity, and (iii) has acquired ‘control’ in such foreign entity. The investment in debt instruments issued by the foreign entity will require a loan agreement and rate of interest on an arm’s length basis.
3. What constitutes ‘Control’: This has been defined widely as 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 10% or more of voting rights or in any other manner in the entity. In addition to the right to appoint majority of the directors/ to control management/ policy decisions where the shareholding is less than 10%, even a mere 10% shareholding will amount to control under the ODI Guidelines.
4. Pricing Guidelines now applicable: Under the erstwhile ODI regime, valuation of shares was required to be obtained for transfer of shares, partial/ full acquisition of a foreign entity, and swap of shares. However, unlike in the case of FDI, pricing guidelines did not specifically apply to ODI. This position has changed under the new ODI Guidelines and pricing guidelines have now been introduced. The issue or transfer of equity capital of a foreign entity (i) from a person resident outside India or a person resident in India to a person resident in India who is eligible to make such investment or (ii) from a person resident in India to a person resident outside India is now required to be made at a price arrived on an arm’s length basis after taking into consideration the valuation as per any internationally accepted pricing methodology for valuation.
5. NOC from lender bank/regulatory body/investigative agency for ODI: Earlier there was a blanket prohibition on Indian party making any investments and financial commitment under the ODI if such Indian Party appeared on the Reserve Bank’s Exporters’ caution list / list of defaulters to the banking system circulated by the RBI / or any credit information company or the entity under investigation by any investigation / enforcement agency or regulatory body. The blanket ban has now been replaced with a requirement for a NOC. Now, any person resident in India (i) having an account appearing as a Non-Performing Asset (NPA) (ii) being classified as wilful defaulter or (iii) who is under investigation by a financial sector regulator/ investigative agency is required to obtain an NOC from the lender bank/regulatory body/investigative agency concerned, before making any financial commitment or undertaking any disinvestment. Interestingly, the concept of presumption of no objection has been introduced where the lender bank/regulatory body/investigative agency concerned fails to furnish the NOC within 60 days of the application.
6. Introduction of Overseas Portfolio Investment (“OPI”): The ODI Guidelines define OPI as investment other than ODI, in foreign securities. However, OPI shall not be made in (i) any unlisted debt instruments; (ii) any securities issued by a person resident in India who is not in an IFSC; (iii) any derivatives unless otherwise permitted by Reserve Bank; or (iv) commodities including Bullion Depository Receipts (BDRs). While the financial commitment of an Indian entity under ODI is capped at 400% of such Indian entity’s net worth as on the date of the last audited balance sheet, investment as OPI by an Indian entity cannot exceed 50% of its net worth as on the date of its last audited balance sheet. The liberalised position therefore is that any operating Indian company can make investment through OPI and this is an avenue that may be used in the near future. It is pertinent to note that unlike in the case of listed Indian companies, OPI by an unlisted Indian entity may be undertaken only in limited scenarios such as (i) acquisition of equity capital by way of rights issue or allotment of bonus share, (ii) capitalisation as permitted under FEMA, (iii) swap of securities, and (iv) merger, demerger, amalgamation or any scheme of arrangement.
7. Investment by MFs, VCFs and AIFs: These SEBI registered entities can invest overseas in securities as stipulated by SEBI within an overall cap which is USD 7 billion for Mutual Funds (“MFs”) and USD 1.5 billion for Venture Capital Funds (“VCFs”)/Alternative Investment Funds (“AIFs”). Any investment by these entities in foreign securities (listed or unlisted), will be treated as OPI.
8. ODI in Start-ups: ODI in start-ups can only be made from internal accruals from the Indian entity or group or associate companies in India and in case of resident individuals, from own funds of such an individual. Before facilitating a transaction, the AD Bank is required to obtain a certificate in this regard from the statutory auditors/chartered accountant of the Indian entity/investor.
9. Clarification re Round Tripping: Under the erstwhile FEMA 120, the RBI did not permit an Indian party (i) to set up Indian subsidiary(ies) through its foreign WOS or JV or (ii) to acquire a WOS or invest in JV that had direct/indirect investment in India. The earlier blanket restriction has now been liberalised and the change no longer restricts such investment as long as the structure does not result in more than two layers of subsidiaries. (The layer restriction does not apply to (i) banks, (ii) systemically important NBFCs, (iii) insurance companies and (iv) government companies.)
10. Swap of Securities (not just of shares): While FEMA 120 only permitted ODI through swap of shares, the ODI Rules now also permits a swap of ‘securities’ by an Indian entity and a swap of securities on account of a merger, demerger, amalgamation or liquidation by a resident individual.
11. Liberalisation of ODI in financial services – While earlier only an Indian entity engaged in financial services could make ODI in a foreign entity directly or indirectly engaged in financial services activity, now even an unregulated Indian entity may invest in such an offshore entity (other than those engaged in banking or insurance activities) without the requirement of RBI approval, provided the Indian entity has posted net profits during the preceding three financial years. As a covid relief measure, the net profit requirement over the last two years may be excluded where the entity is unable to meet the profitability requirement due to covid impact.
12. Rollover of Guarantees: Roll-over of guarantee shall not be treated as fresh financial commitment where the amount on account of such roll-over does not exceed the amount of the original guarantee. This is a welcome change as under FEMA 120 the rollover was not treated as fresh financial commitment only when (i) there was no change in the end use of the guarantee or any other terms and conditions except the validity period and (ii) the reporting of the rolled over guarantee was duly undertaken in Form ODI – Part I; and (iii) intimation to the investigation / enforcement agency or regulatory body where the Indian Party was under investigation.
13. Calculation of limits for financial commitment: Unlike under the erstwhile provisions where the financial commitment of the Indian security provider was calculated as equivalent to the loan amount granted to the offshore entity, now the amount of financial commitment will be calculated as the lower of (i) the value of the pledge or charge or (ii) the amount of the facility. (Note: This will not apply to cases where the facility has been availed by the Indian entity itself).

14. Calculation of limits for financial commitment: Unlike under the erstwhile provisions where the financial commitment of the Indian security provider was calculated as equivalent to the loan amount granted to the offshore entity, now the amount of financial commitment will be calculated as the lower of (i) the value of the pledge or charge or (ii) the amount of the facility. (Note: This will not apply to cases where the facility has been availed by the Indian entity itself).
15. Pledge over equity capital or assets of the foreign entity: The ODI Regulations, now permits a pledge over the equity capital of the foreign entity in which the Indian Party has made ODI or its step-down subsidiary (“SDS”) outside India, in favour of a debenture trustee registered with SEBI for availing fund-based facilities for such Indian entity. Similarly, a charge over assets of the foreign entity in which ODI has been made (or of its SDS outside India) is now permitted not just in favour of an authorised dealer bank but also in favour of a public financial institution for availing of fund or non-fund based facilities, for the Indian entity or the foreign entity in which it has made ODI or its offshore SDS. Such security can now also be created in favour of a debenture trustee registered with SEBI for availing fund-based facilities for such Indian entity, which was not available under the earlier regime.
16. Acquisition of immovable property outside India: A person resident in India may now, without the permission of the RBI, acquire immovable property outside India on a lease not exceeding five years. Earlier, a person resident in India was permitted to acquire immovable property outside India from a person resident outside India jointly with a relative who is a person resident outside India, provided there was no outflow of funds from India. The proviso, restricting outflow of funds from India, now stands deleted. A person resident in India may now also acquire immovable property outside India out of the income or sale proceeds of the assets (other than ODI), acquired overseas under the provisions of FEMA.

The slew of changes brought in by the ODI Guidelines will definitely encourage Indian entities and resident Indians to expand their business in other countries. Some of these changes, especially on OPI by Indian entities, have been long awaited and are being welcomed by market participants.