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Indian entities can make investments in foreign companies that have Indian subsidiaries but the whole investment structure must not have more than two layers.

The Union Ministry of Finance, in August 2022 notified consolidated rules and regulations for Overseas Investment (OI) by business entities of India. In consultation with RBI, GoI has preferred a comprehensive step to the controversial aspect with the aim to simplify the Overseas Investment Rules.

But why this change in the middle of a year? Notably, there has been decline of about 60% in a quarter to quarter comparison with the past year.

To this end, the Centre announced an amendment in the Foreign Exchange Management (Overseas Investment) Rules. 2022 (“New OI Rules”) revising the existing Rules.


Currently, OI by an Indian resident is governed by 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 (which, by the way is now allowed for business purposes)

The New OI Rules will subsume extant regulations for OI and Acquisition and Transfer of Immovable Property outside India Regulations, 2015. These New OI Rules have automated several process and reduced compliance, approvals and disclosures. Is this good? Easier and checks the box on Ease of Doing Business.

Most expectantly, it has eased the round-tripping structure, which prevented Indian companies and investors from setting shop outside India.

Indian startups can build business in collaboration with foreign startups outside India even with some overlaps. There were other limitations too for OI, regulatory complication being one which potentially could be navigated by the GoI, which it did. Earlier Indian entities could not make an investment in a foreign company which had a investment in an Indian Company, now this is possible if the layers of subsidiary in India is less than 2.The RBI has moved half way with some major offering- “late fee for filing delays”;No approval for payment in delayed consideration;Investment/ disinvestment in under investigation startups, aboard;Writing off disinvestments;Investment above 10% in a listed entity or a controlling stake qualifies as an ODI;For it to be classified as portfolio investment (OPI), it has to be less than 10%, which earlier was available only to listed Indian entities, now in case of merger, de-merger, rights issue and bonus issue, unlisted entities can also make this investment;An investment in a foreign company for less than 10% can be made without having to form a Joint Venture and RBI has removed concepts of Wholly Owned and Joint Ventures, redundant in case of ODIs;The Indian entity can acquire immovable property outside India for business and residential purposes;The Indian entity can sell equity capital to an Indian resident, who is eligible to make such investment under these rules or to a person resident outside India
It was considered an ODI even with less than 10% of voting rights, and for OPI only more than 10% was allowed for listed companies. Now For less than 10% it will be considered as OPI, which can be through rights issue, bonus issue, restructuring or share swapThe largest controversy was around “Round Tripping”, which essentially meant Indian Companies could not invest in a Foreign Company which already had made a direct or indirect investment in an Indian Company in India. This is now possible without prior approval of the RBI, if the foreign company being invested in has less than 2 levels of subsidiaries. This, is still not allowed in companies with more than 2 layers of subsidiaries.   This is supportive of the Indian start up communities to have a flip structure where it can have investment in a foreign company. With a small alteration in the definition of Subsidiary (which includes control and does not include minority investment), a 2 level subsidiary is permissible including future direct or indirect investments and offshore entities.  
Investment was not allowed, but now this is allowed with an NOC.RBI registered NBFCs could make overseas investment in fintech companies or in financial services. This acted as a restriction for most individual investors from investing in fintech in foreign companies, as they were either not NBFCs or could not overcome the steep compliance requirement.   With some checks and balances in place, companies can now invest in companies registered with the International Financial Services Center (IFSC). Exceptions include ESOP, inheritance, acquisition of sweat equity or minimum qualification shares.   A non-fintech Indian company can invest in a foreign fintech company if the Indian company has filed profits in the preceding 3 years. If the Indian company has not filed any profits then the company can invest in foreign entity in IFSC in India. The foreign company’s Indian subsidiary should also fall under the Indian financial sector regulator.  
This required approval of the RBI but now is under automatic route 
This investment could be made from account holding Resident Foreign Currency or bonus shares on existing holding or for NRIs foreign currency resources outside India. NOW These can be made from the cash reserves and profits of the investor company.Country restriction position has been clarified, Pakistan will require the permission of the Central Government and Nepal and Bhutan through freely convertible currencies. 

Here’s the official notification of Department of Economic Affairs

Here’s the official notification of RBI

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