Overseas Direct Investment Meaning, Regulations, and Pricing Guideline

Overseas Direct investments help businesses grow by offering global opportunities in India. These investments provide access to better technology, research, more significant markets, and lower costs, strengthening Indian companies and increasing their brand value. They also boost foreign trade and technology transfer, which creates jobs and promotes growth in India. The article will discuss the concept of Overseas Direct Investment in detail.

Enroll Now for Company Secretary Courses

Meaning of Overseas Direct Investment

What is The Meaning of Overseas Portfolio Investment?

The Foreign Exchange Management Act, 1999

• Clarity on Definitions: The new rules provide greater clarity and precision regarding various definitions used in the regulations, making it easier to understand and apply the rules.
• The “Strategic Sector” : A new “strategic sector” category has been introduced, which may affect how investments are classified and regulated based on their strategic importance.
• Removal of Certain Approval Requirements:

• The requirement to seek specific approval for deferred payments related to investments has been eliminated.
• Investments by Indian residents under investigation by any regulatory or investigative agency no longer need prior approval.
• Issuing corporate guarantees to or on behalf of second or subsequent-level step-down subsidiaries (SDS) no longer requires special approval.
• The process for writing off investments due to disinvestment has been simplified, removing the need for additional approvals.

• Introduction of a Late Submission Fee (LSF): A fee will now be charged for delays in reporting, which aims to encourage timely compliance and streamline the reporting process. These updates reduce hurdles and make it easier for Indian entities to invest overseas.

New Regime for Overseas Direct Investment

• Foreign Exchange Management Rules 2022: These rules provide the guidelines for non-debt instruments' transactions. They cover aspects related to investments in foreign securities that do not include borrowing or debt arrangements.
• Foreign Exchange Management Regulations, 2022: These regulations outline the rules for transactions that involve debt instruments. They include details on managing investments involving loans, bonds, or other forms of debt.
• Foreign Exchange Management Directions: 2022: These directions offer comprehensive instructions on how to apply the rules and regulations mentioned above. They ensure a consistent approach to managing overseas investments according to the established guidelines.
• Reporting under the Foreign Exchange Management Act, 1999 (Updated August 22, 2022): This document provides the procedures and requirements for reporting overseas investments. It details how Indian residents and entities should report their foreign investments to comply with legal obligations.
• Liberalised Remittance Scheme (LRS) (Updated August 24, 2022): This direction updates the guidelines for the Liberalised Remittance Scheme (LRS). It incorporates the new rules and regulations for making overseas remittances, ensuring they align with the latest legal framework.

Restrictions and Prohibitions on Overseas Direct Investment

Rule 19 outlines the restrictions and prohibitions for ODI transactions:

• Indian residents cannot invest in foreign entities in real estate trading, gambling, or financial products linked to the Indian rupee without RBI approval.
• Indian companies can only use their internal funds to invest in foreign start-ups. Individual Indians must use their money for such investments.
• Indian residents cannot invest in foreign entities that invest back into India, creating a structure with more than two layers of subsidiaries.

Exceptions on ODI

These restrictions do not apply to:

• Banks as defined in the Banking Regulation Act 1949.
• Systemically important non-banking financial companies registered with the Reserve Bank of India.
• Insurance companies operating under the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999.
• Government companies are defined in the Companies Act, 2013.

Pricing Guidelines For Overseas Direct Investment

• From a person outside India to an Indian resident,
• From one Indian resident to another eligible Indian resident, or
• From an Indian resident to a person outside India,

Modes of Payment For Overseas Investment

• Bank remittance,
• Funds from an account compliant with the Act,
• Security swaps,
• Proceeds from American Depository Receipts (ADRs), Global Depositary Receipts (GDRs), stock swaps of such receipts, or external commercial borrowings as per the Act's rules and regulations.