The Central Government and the Reserve Bank of India
(“RBI”) rationalised the legal framework
for overseas investments in its entirety and issued:
The Foreign Exchange Management (Overseas Investment) Rules,
2022 (“OI Rules”); and
The Foreign Exchange Management (Overseas Investment)
Regulations, 2022 (“OI
With the new regime, the government not only aimed to strengthen
the regulation of overseas investments by introducing measures like
(“LSF”) on delays in
reporting but also provided enhanced clarity to various
definitions, and opened new realms of investing overseas for the
Indian entrepreneurs viz., overseas investment in Strategic
sectors, start-ups, Step-down subsidiary, etc by introducing the
Overseas Investment by an Indian entity means aggregate of
foreign financial commitment and overseas portfolio investment in
Financial commitment by way of Overseas Direct
ODI means investment made by Indian entity in equity
capital1 of a limited liability
foreign entity2 engaged in bonafide
business activity (i.e. permissible business activity under
Indian law and laws of the country where foreign entity is
situated), in the following manner:
Unlisted foreign entity irrespective of the percentage of the
equity capital being held by the Indian entity.
10 % or more of the paid-up equity capital of a listed foreign
Investment with control in a listed foreign entity up to 10 %
of the paid-up equity capital.
Restrictions and Prohibitions
An Indian entity cannot make ODI in the foreign entities engaged
in real estate activity (i.e. buying and selling of real estate
or trading in transferable development rights), gambling
activity of any kind.
With the specific approval of RBI, an Indian entity can make ODI
in foreign entity(ies) dealing with financial products linked to
the Indian rupee and/or entities registered in Pakistan.
Financial commitment by way of debt (fund
An Indian entity can give loan or invest in debt instruments of
a foreign entity, in which it has made ODI, subject to the
following conditions:
The debt should be backed by a loan agreement.
The rate of interest should to be charged at arm’s length
basis (i.e. a transaction conducted in a manner between unrelated
parties without conflict of interest).
Financial commitment by way of guarantee, pledge,
charge, deferred payment for acquisition or transfer (non-fund
Guarantee: An Indian entity (including its
holding, subsidiary, promoter or promoter group company) can
issue corporate or performance guarantee to or on behalf of the
foreign entity (including its step-down subsidiary(ies)),
in which it has made ODI.
Further, in case of a performance guarantee, only 50 % of the
amount of guarantee is reckoned towards the financial commitment
Pledge or Charge: An Indian entity which has
made ODI by way of investment in equity capital in a foreign
entity, can pledge the equity capital of such foreign entity or ofUdabur Investment
its step down subsidiary(ies) outside India or create a charge by
way of mortgage, pledge, hypothecation or any other identical mode
on its assets in India, including the assets of its group company
or associate company, promoter or director or on assets of foreign
entity, for availing fund or non-fund based facility for such
foreign entity or its step down subsidiary(ies) outside
In calculating the foreign commitment, the value of the pledge
or charge or the amount of the facility, whichever is less, is
considered if the facility itself has not already been included in
the prescribed limit.
Deferred payment: A person resident in India,
may defer the consideration to be paid to acquire/ invest in equity
share capital of a foreign entity subject to the following
The period of deferment and the valuation in accordance with
the pricing guidelines should be decided upfront.
the final consideration shall be compliant with the applicable
pricing guidelines..
The part of the deferred consideration in case of acquisition
of equity capital of a foreign entity by the person resident in
India shall be treated as non-fund based financial commitment.
Overall limit for financial commitment
The total foreign financial commitment made by an Indian entityVaranasi Investment
in all the foreign entities taken together at the time of
undertaking such commitment cannot exceed 400% of
its net worth as on the date of the last audited balance sheet
(i.e. a balance sheet not exceeding 18 months from the
Financial commitment of USD 1 billion or more in a financial
year by an Indian entity requires prior RBI approval even if the
Indian entity is within the aforesaid threshold of 400%.
Further, Maharatna or Navratna or Miniratna or subsidiaries of
such public sector undertakings are permitted to invest exceeding
the above-prescribed limit of 400% in foreign entities engaged in
“Equity capital” means equity shares or
perpetual capital or instruments that are irredeemable or
contribution to non-debt capital of a foreign entity in the nature
of fully and compulsorily convertible instruments;
“Foreign entity” means an entity formed
or registered or incorporated outside India, including
International Financial Services Centre that has limited
Provided that the restriction of limited
liability shall not apply to an entity with core activity
in a strategic sector;
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Jaipur Wealth Management
