Government revamps overseas investment framework; heres what analysts have to say!
Under the new rule, the government has provided information on overseas portfolio investment (OPI), which indicates that investments can be made in both listed as well as unlisted entities.
On August 22 (Monday), the Government of India announced a revamp of the overseas investment framework in an attempt to improve the ease of doing business in India. This includes the ease for domestic firms willing to invest in foreign companies. The Ministry of Finance said that these changes have been aligned with the current business and economic dynamics.
Under the new rule, the government has provided information on overseas portfolio investment (OPI), which indicates that investments can be made in both listed as well as unlisted entities. Following this, here’s what Aashit Shah, Partner, JSA and Raj Ramachandran, Partner, JSA have to say regarding the recent development.
From the financial perspective, Aashit Shah, Partner, JSA (leading national law firm) says, “The new overseas investment rules and regulations have a significant impact on cross-border lending transactions. Some changes beneficial for lenders include the creation of pledges on shares and security on assets of overseas entities & step-down subsidiaries (SDS) for a wider range of overseas lenders and Indian debenture trustees as well as provision of guarantees for obligations of SDS without prior RBI approval. However, it appears that security on assets of the overseas entities and SDS now cannot be created for debt raised by group companies and sister/associate concerns of the Indian entity, which was earlier permitted. It is also noteworthy that if there are delays in making requisite filings cannot make further financial commitments unless the delays are regularised. If an Indian entity has an account that is an NPA or is classified as a wilful defaulter or is under investigation by a financial service regulator or investigative agency, then it needs a NOC from the lender, regulator, or agency prior to making any financial commitment. This is probably to ensure there is no flight of capital where the Indian entity has defaulted on its debts provided by Indian lenders. However, a deemed NOC concept has also been introduced if no NOC is provided within 60 days. Also, there is now a clear requirement on Indian entities that want to make overseas debt investments to ensure there is a loan agreement and that interest is charged on an arm’s length basis.”
Meanwhile, from the corporate perspective, Raj Ramachandran, Partner, JSA added, “The Overseas Investment Rules & Regulations, 2022 notified on and effective from August 22, 2022, has, inter alia, clarified several aspects governing investments outside India.”
Raj Ramachandran further elaborates a few terms for better understanding:
“Bona fide business activity should not constitute round tripping - ‘Bona fide business’ has been defined to mean any business activity permissible under any law in force in India and the host country or host jurisdiction. The revised provisions stipulate that any investment outside India by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or indirectly, through a step-down subsidiary or a special-purpose vehicle. There are also provisions that permit a person to make an investment in a foreign entity that has invested or invests in India any time later. Read together with the bona fide business definition, it would appear that investment made from India in a foreign entity via permissible structures (not more than two layers of subsidiaries) will not be construed as ‘round tripping’ merely because of the flow of funds provided it is a bona fide business activity.
The distinction between overseas portfolio investment and overseas direct investment - An Indian company, making overseas investment in an unlisted foreign entity or in excess of 10 per cent in a listed foreign entity, would constitute ODI. If such investment is less than 10 per cent in a listed foreign entity, the same would be considered as OPI. Therefore, even minority investments by Indian companies in unlisted equity securities can now only be under the ODI route.
Clarity on pricing for overseas investments -The regulations stipulate that a primary or secondary investment by an Indian party shall be subject to an arm’s length price. The AD bank is required to ensure compliance with the arm’s length pricing taking into consideration the valuation as per any internationally accepted pricing methodology. There is no specific stipulation of a floor or a cap. The intent, therefore, seems to be that the test of arm’s length pricing should be met, without any other pricing restrictions.”