How the revised ODI regulatory framework will help Indian companies invest overseas

These changes come at a time when an increasing number of overseas investments by Indian conglomerates are making headlines. While ODI outflow saw a fall from US$13.17b in 2019-20[1] to US$12.37b in financial year 2020-21 due to the pandemic, while it has increased to US$17.54b[2] in financial year 2012-22 due to India’s booming economy,” said Chugh. “Since all investments may not fructify, there is a need to show a loss on the balance sheet. This needed many approvals. Now there is clarity on definitions such as strategic sectors, procedures for investment or disinvestment by persons who are residents of India — those under investigation could not do ODI or needed approvals,” he added. 

Many Indian companies want to increase their competitiveness in the global market by acquiring or setting up businesses abroad. Fast decision-making enables such ventures. “These regulations have largely addressed such issues. There were situations when lack of clarity meant companies had to approach the RBI, which caused delays in their attempt to make strategic acquisitions in sectors such as energy, against competition from companies in countries like China,” added Kumar.

Investment regulations reflect the overall economic environment and therefore, such changes are taking place not only in India but also internationally. Kumar said, “For Indian multi-nationals, the changes in ODI regulations mean more flexibility and faster decision-making regarding their existing investments as well as strategy for new investments.”   

In addition, approval is no longer needed for deferred payment options for acquisitions.

Financial services: The new rules, however, restrict Indian entities (company, LLP or a firm) from investing in a foreign company that is involved in real estate (trading of land) and gambling. 

Another welcome move is that “now, an Indian company can invest in a foreign company that undertakes financial services other than banking and insurance. Earlier, it was not possible for an Indian company or startup that was not in the financial service sector to invest in such companies abroad,” said Sisodia. 

A resident individual, however, cannot invest in a foreign company that undertakes financial services activity. A resident individual who has control in a foreign entity also cannot set up step-down subsidiaries abroad. The same is permitted if the resident individual does not have control. Same is subject to overall limits of US$250,000 allowed under Liberalised Remittance Scheme (LRS)[3]. “These measures give clarity to what a resident individual can do in ODI,” said Sisodia.

Round-tripping: The new ODI regulations cover the sensitive topic of round-tripping, providing clarity on scenarios where it is allowed and where it is not allowed. Earlier, the RBI provided approval on a case-to-case basis and only for roundtrip of investment (and not of funds). “However, the Department of Revenue has reservations on account of tax leakages and tracing the origin of funds. Now, the RBI has permitted round-tripping for genuine business reasons; however, the number of layers has been restricted to two in line with Indian corporate laws,” said Singh. The reason is that till two layers, it is considered bona fide and general industry practice. 

OPI: There is further clarity in OPI and related definitions. The question used to be whether a minority investment by residents or a resident company in an unlisted entity abroad is an OPI. The regulations now clarify the OPIs would fundamentally mean investment in listed securities only. “There will be no restrictions on sector, round-trip or multi-layer and the only restriction is on the quantum of investments,” said Sisodia. Unlisted Indian entities have still more restrictions. 

IFSC: A listed or unlisted Indian company or individual can, however, invest in the International Financial Services Centre (GIFT City) by contributing to investment funds or investment vehicle set up therein as OPI, subject to quantum limits. This change removes ambiguity regarding inviting Indian domestic investments.

Startups: There is now more clarity in the definition of startups as well. At present, a startup will be defined based on the perspective of the foreign or host country. “Since startups are considered comparatively risky investments, only the startups’ own funds/ internal accruals are permitted to be invested, i.e., the investee is a startup,” said Vishwanathan. 

The guidelines unfold a liberal architecture of self-regulation, keeping in mind the evolving business needs of an increasingly integrated global market. The government has tried to move in line with the changing ecosystem of operating businesses worldwide by bringing in new concepts like control, overseas portfolio investment, etc. It has opened new avenues by permitting non-financial entities to invest in foreign financial entities or the International Financial Services Centre. 

(This article is written by Devraj Singh, Executive Director, Tax & Regulatory Services, EY India, with contribution from Kapil Manocha, Senior Manager, EY India.)