Centre proposes stricter valuation rules for overseas direct investments

New rules will be effective from Monday

The government on Monday introduced new set of rules for domestic entities, including companies and large family offices and start-ups, opting for overseas direct investment route (ODI), which could impact their acquisition decisions in a big way.

The new rules, effective from Monday, made explicit distinction between ODI (all investments in unlisted foreign entities and more than 10 per cent in listed foreign entities) and OPI (investment by listed companies in foreign listed securities). The rules state that all transactions of ODI must happen at fair value.

Besides, round tripping structures now do not require approval from Reserve Bank of India, if the structure involves less than two levels of subsidiaries.

The rules also clarified that gift of foreign securities is permitted only between relatives. Earlier, anyone could have gifted securities to Indian persons. 

“Barring banking and insurance companies, non-banking finance companies and government entities, any domestic entity cannot make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries," according to the new regulations notified by the Ministry of Finance.

“Any ODI in start-ups, recognised under the laws of host country, could be made by an Indian entity only from the internal accruals whether from the Indian entity or group or associate companies in India and in the case of resident individuals, from own funds of such an individual," said Sandeep Jhunjhunwala, tax partner at Nangia Andersen LP. 

The new rules also seek tightening of the reporting requirements for domestic entities opting for the ODI route, wherein domestic firms will have to submit the slew of evidence of investments within the time specified. Failing which, the firms will attract late submission fees as prescribed by the Reserve Bank of India. The central bank is expected to come out with a detailed circular on this.

The ODI route is for non-individuals entities like corporates and trusts. Individuals use a different route to remit money outside called the Liberalised Remittance Scheme (LRS).

The overseas investment rules, notified under the foreign exchange management Act (FEMA) will subsumed all existing rules pertains to overseas investment along with those for acquisition and transfer of immovable property outside India. The Reserve Bank of India will administer the new regulations, the ministry of finance notifies.  

“The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics,” the ministry stated. 

Ministry of Finance said the new rules will bring clarity on overseas investment and related transactions, which were earlier under approval route of the central bank. Now all those will be under automatic route which will significantly enhance ease of doing business, it noted. 

The RBI had earlier released a draft of Foreign Exchange Management (Non-debt Instruments - Overseas Investment) Rules, 2021, for public comments.