To simplify the regulatory landscape for overseas direct investment, the Indian government issued the Foreign Exchange Management (Overseas Investment) Directions, 2022 (OI directions), the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (OI regulations) and Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI rules).
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Shardul Amarchand Mangaldas & Co.
Collectively referred to as the OI regime, these regulations have overhauled and superseded the previous regime governing overseas investment from India. The OI regime stipulates the conditions, including restrictions, for undertaking financial commitments, investing in debt instruments, reporting requirements, etc.
While the OI regime has provided clarity and a simplified process, there remain a few aspects that require further clarification from the regulator.
This article deals with one such aspect concerning the restrictions specified under the OI regime for undertaking financial commitment in a foreign entity where there has been previous reporting on non-compliance.
Under the OI regime, the term “financial commitment” inter alia refers to the aggregate amount of investment by a person resident in India through overseas direct investment, debt (excluding overseas portfolio investment), or non-fund-based facilities extended to all foreign entities. As per regulation 12 of the OI regulations, in case of any failure or delay in making the requisite filing for reporting any overseas direct investment transaction made by a person resident in India, then any further financial commitment in such a foreign entity is restricted until such failure or delay in reporting is regularised.
Regulation 12 of the OI regulations states:
“Restriction on further financial commitment or transfer. A person resident in India who has made a financial commitment in a foreign entity in accordance with the act or rules or regulations made thereunder, shall not make any further financial commitment, whether fund-based or non-fund-based, directly or indirectly, towards such foreign entity or transfer such investment till any delay in reporting is regularised.”
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Shardul Amarchand Mangaldas & Co.
While regulation 12 of the OI regulations restricts any further overseas direct investment in the specific overseas entity for which filings have not been made or have been delayed, however, paragraph 19 of the OI directions contains a similar provision, stating that: “AD Bank shall not be entitled to facilitate any outward remittance/further financial commitment, by any person resident in India towards a foreign entity, until any delay in reporting is regularised and may be guided by regulation 12 of OI regulations.”
From an independent reading of paragraph 19 of the OI directions, along with the specific usage of the term “a foreign entity”, the intention is to restrict any outward remittance or further financial commitment by a resident individual towards any foreign entity unless past non-compliances in relation to the overseas direct investment in such a foreign entity are regularised. This creates a dilemma as to whether the OI regime restricts further overseas direct investment in an overseas entity (in relation to which there exists any non-compliances such as non-filing or delay in filing).
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Shardul Amarchand Mangaldas & Co.
While there exists inconsistency on the subject due to the reading of regulation 12 of the OI regulations and paragraph 19 of the OI directions, the authors note that among the many divergent views, the most prevalent is that in case any default/delay (in reporting) has been reported with respect to any overseas entity (non-compliant overseas entity), then any further financial commitment by any person (any existing Indian investor or any new Indian investor) in such a non-compliant overseas entity is restricted in accordance with regulation 12 of the OI regulations. However, this restriction will not extend to any Indian person (who has made an investment in a non-compliant overseas entity) making a further financial commitment in any other overseas entity (except for the non-compliant overseas entity).
While the position stipulated above is being followed by various stakeholders, including authorised dealer banks, there is no express clarity by the regulator.
The simplified OI regime is a welcome development, providing clarity on overseas investment. However, as Indian businesses continue to expand through overseas direct investment, the regulator should minimise the potential for multiple interpretations. This helps Indian corporations explore new opportunities abroad.
To eliminate any remaining uncertainties, the Reserve Bank of India should issue a circular, FAQs, or amendments to the OI regime.
This article provides a general guide to the subject matter. Specialist advice should be sought regarding your specific circumstances.
Rohan Jain is a partner, Kshitij Arora is a principal associate, and Shruti Jaju is an associate at Shardul Amarchand Mangaldas & Co.
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