The Reserve Bank of India on 22nd August, 2022 introduced new set of rules for resident Individuals, domestic Indian entities and start-ups, opting for Overseas Direct Investment route (ODI), which has long lasting impact on their business structure and their Regulatory Planning. Though, we shall come up with a detailed analysis of the rules- here are the 5 Primary observation from the rules.
- Overseas Portfolio Investment can’t be in unlisted shares –
The Guidelines clearly define “Overseas Portfolio Investment” or “OPI” as investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC. Here, “ODI” means investment by way of acquisition of unlisted equity capital of a foreign entity, or subscription as a part of the memorandum of association of a foreign entity, or investment in ten per cent, or more of the paid-up equity capital of a listed foreign entity or investment with control where investment is less than ten per cent. of the paid-up equity capital of a listed foreign entity. In other words, irrespective of the investment amount or percentage of holding, any investment in unlisted shares can only be treated as ODI and not Portfolio Investment.
- Importance given to Fair Value of the Shares –
The rules state that all transactions of ODI must happen at fair value. Valuation of the concerned securities is of huge importance and the RBI has entrusted the AD Bank on the same. Under Clause 16 (2) of the rules it states that the AD bank, before facilitating a transaction under sub-rule (1), shall ensure compliance with arm’s length pricing taking into consideration the valuation as per any internationally accepted pricing methodology for valuation.
- Formation of Step-Down Subsidiary –
RBI has indirectly allowed person residing in India to form two Layers of Subsidiaries. However, these Companies cannot be dealing with the banking business, NBFC, Insurance and cannot be Government Companies. This has been long awaited and it seems for now that Indian Tech Entrepreneurs can have an Overseas Holding Company which can have a Step- Down Subsidiary back in India. However, further clarity is being awaited in this regard from the Government and the final interpretation can be done based on it.
- Challenges in Gifting –
RBI has put in several conditions for Resident Individuals to get shares of overseas companies as Gift. It stated that –
(1) A resident individual may, without any limit, acquire foreign securities by way of inheritance from a person resident in India who is holding such securities in accordance with the provisions of the Act or from a person resident outside India.
(2) A resident individual, without any limit, may acquire foreign securities by way of gift from a person resident in India who is a relative and holding such securities in accordance with the provisions of the Act.
(3) A resident individual may acquire foreign securities by way of gift from a person resident outside India in accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010 ( 42 of 2010) and the rules and regulations made thereunder.
- RBI categorically defines “What is Control”
RBI has defined Control and it has a major impact in understanding what construes as Subsidiary.
It is to be noted that “Subsidiary” or “step down subsidiary” of a foreign entity means an entity in which the foreign entity has control. Now “Control” here means the right to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten per cent. or more of voting rights or in any other manner in the entity.
In other words, if it can be established that the Foreign Entity by virtue of holding just 10% shares in a third entity and through an indirect right has the control over the policy decisions of the company then this third entity can be deemed to be a step-down subsidiary of the Foreign Entity.
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