Overview: Foreign Exchange Management (Overseas Investment) Rules & Regulations, 2022

The Ministry of Finance, Department of Economic Affairs vide its notification no. G.S.R. 646(E), dated 22 August 2022 notified The Foreign Exchange Management (Overseas Investment) Rules, 2022 (“FEMA ODI Rules, 2022”)

On 22^nd August 2022 the Reserve Bank of India (“RBI”) vide its notification no. FEMA 400/2022-RB notified the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“FEMA ODI Regulation 2022”).

In today’s newsletter, we aim to provide a broad overview of –

• What are the FEMA ODI Rules, 2022 and the FEMA ODI Regulations 2022;
• What all FEMA laws, does the FEMA ODI Rules, 2022 and the FEMA ODI Regulations, 2022 affect; and
• How will the FEMA ODI Rules, 2022 and the FEMA ODI Regulations, 2022 impact businesses in India;

As part of a comprehensive exercise to simplify the outwards remittance rules and, in line with the amendments to the Foreign Exchange Management Act, 2015; the RBI vide its notification dated 9 August 2021 had presented a draft of the (i) Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules, 2021; and a draft of the (ii) Foreign Exchange Management (Overseas Investment) Regulations, 2021 – to the public domain for consultations.

The above rules and regulations pertaining to overseas investment emerging from India were open for public comments till 23 August 2021 and have been finalised post the public consultation.

As per the Ministry of Finance, Department of Economic Affairs, the FEMA ODI Rules, 2022 will be administered by the RBI which will issue requisite directions, circulars, instructions and clarifications, from time to time, as may be necessary for the effective implementation of the provisions of these rules and; in furtherance to the same the RBI has notified the FEMA ODI Regulations, 2022, simultaneously with the FEMA ODI Rules, 2022.

The FEMA ODI Rules, 2022 provides for inter alia the prescribed manner and terms & conditions for:

• Overseas Direct Investment (ODI) by an Indian entity;
• Overseas Portfolio Investment (OPI) by an Indian entity;
• Overseas Investment (OI) by resident individual;
• Overseas Investment (OI) by person resident in India other than Indian entity and resident Individual and;
• Overseas Investment (OI) in IFSC by person resident in India.

The FEMA ODI Regulations, 2022 inter alia prescribe the mode of payment, deferred payment of consideration, reporting, realisation, and other requirements for any investment/lending outside India by a person resident in India.

The FEMA ODI Rules, 2022 are notified in supersession of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

As per the Finance Minister Nirmala Sitharaman, “the revised regulatory framework for overseas investment simplifies the existing overseas investment framework and aligns with the present economic and business dynamics”.

As the FEMA ODI Rules, 2022 have only recently been notified, it has yet to be put into practice by the industry experts and legal advisors to see and verify if the process for overseas investment by an Indian entity/individual has actually simplified from the previous relevant FEMA regulations.

The FEMA ODI Rules, 2022 and the FEMA ODI Regulations, 2022 will bring about a slew of changes that will impact not only cross border merger and acquisitions, overseas investment decisions of Indian residents but will also include any financial activity outside of India by corporates and start-ups in India, including overseas lending.

Similar to how India has received a lot of funding from overseas investors and funds, India Inc. has also provided funding for investments in companies registered outside the territory of India.

Various overseas investment-related transactions, which were earlier under the approval route have now been allowed under the automatic route, under the FEMA ODI Rules, 2022.

Further, as per the FEMA ODI Rules, 2022, any overseas investment by an Indian entity can be made in start-ups recognised under the laws of host country, however only from the internal accruals of the Indian entity or group or associate companies in India.

In the event the overseas investment is being made an Indian resident individual in a start-up, recognised under the laws of host country, such overseas investment can be made by the Indian resident individual only from his/her own personal funds.

P.S. – As the FEMA ODI Rules, 2022 have recently been notified, we at SLP wanted to keep you appraised on the same – as legal updates in the industry. Once the FEMA ODI Rules, 2022 have been tested on certain transaction by us and other industry experts we work with, we will share our detailed analysis on the same.