News and developments
REVAMP OF OVERSEAS INVESTMENT REGULATORY FRAMEWORK
The New ODI Framework is more transparent and simplified for overseas investments with minimum compliances. While approval requirements have been done away with in some cases at the same time, more accountability and consequences of delayed reporting have been introduced. This overhaul has been made to improve the ease of doing cross-border transactions.
Let us dive into the key changes brought under the New ODI Framework:
Changes in Definition
Some of the key terms that have been defined/ revised under the New ODI Framework are as follows:
Indian entity
It includes a company incorporated under the Companies Act, 2013 (“Act”); a body corporate incorporated under any law; or Limited Liability Partnership, or a registered partnership’.
It is similar to the definition of ‘Indian Party’ provided under the Former ODI Norms with a key change that each investor entity shall be separately considered as an Indian entity instead of all the investors from India in a foreign entity being together considered as Indian Party.
Control
It is similar to the definition of ‘Control’ under the Act. Control means the right to appoint a majority of directors or to control management or policy decisions either individually or collectively whether directly or indirectly arising by virtue of their shareholding or any agreement. The key distinction from the Act is the linkage to 10% of the voting rights. As per the definition of Control under the New ODI Framework having entitlement of 10% voting rights in an entity may lead to establish control for the purposes of overseas investment.
Foreign entity (erstwhile overseas JV/ WOS)
The concept of joint venture/ wholly owned subsidiary has been substituted with the concept of ‘foreign entity’ which means a foreign entity having liability including in the International Financial Services Centre (“IFSC”).
It also clarifies that in the event a foreign entity is an investment fund/ vehicle regulated by the regulator of the financial sector in the host jurisdiction and set up as a trust outside India, the liability of the person resident in India should not exceed the interest or the contribution in the fund and trustee of that trust should be a non-resident.
It is important to note that for the first-time entities formed or registered in IFSC has been recognized as a ‘foreign entity’ under the ODI regime.
Subsidiary or step-down subsidiary (“SDS”) of the foreign entity
The definition of SDS now includes an element of control. SDS means an entity in which a foreign entity holds ‘control’, and such entity shall have limited liability, and whose core activity is not in the strategic sector as defined under the New ODI Framework. If the foreign entity does not have control over such entity, then it shall not be treated as SDS and hence, no reporting is required.
ODI and Overseas Portfolio Investment (“OPI”)
The term ‘ODI’ has been defined to mean investment: (i) by way of acquisition of any unlisted equity capital or subscription as a part of the memorandum of association of a foreign entity; (ii) an investment in 10% or more of the paid-up equity capital of a listed foreign entity; or (iii) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
OPI primarily means overseas investments other than ODI in foreign securities (except in unlisted debt securities or securities issued by Indian residents (except IFCSs)).
It is pertinent to note that once the investment is classified as an ODI/ OPI, it will continue to be treated as an ODI/ OPI even if does not satisfy the ‘10%’ or ‘control’ or listing criteria at any later point in time.
Overseas Investment
It means OPI and Financial Commitment made by a person resident in India.
Financial Commitment
It has been redefined to mean the aggregate amount of investment by way of ODI, debt other than OPI and non-fund-based facilities extended by an Indian entity to all foreign entities.
It has been permitted that Indian entities may lend or invest in any debt instruments issued by a foreign entity or extend the non-fund-based commitment to or on behalf of a foreign entity, including overseas SDSs of such Indian entity, subject to the following conditions:
- the Indian entity is eligible to make ODI;
- the Indian entity has made ODI in the foreign entity; and
- the Indian entity has acquired control in the foreign entity on or before the date of making a such financial commitment.