New ODI regulations: Govt allows investment in financial services abroad

Holding less than 10% in an overseas entity not considered 'control'

Indian companies not in financial services can now directly invest in financial-services firms abroad, such as brokerages, asset management funds, and credit cards under the automatic route. Banks and insurance firms have been kept out of this.Earlier, such investment was prohibited.

This is according to the new overseas direct investment (ODI) regulations notified by the finance ministry on Monday. They are aimed at easing rules for domestic firms that want to invest abroad. The move could open the door for many companies that want to do so.

A company can now invest four times its profit if it has been profitable for three years. “Enabling Indian entities not engaged in financial activities to invest in financial services will improve the available avenues to deploy surplus funds. In addition to this it will also enable them to diversify in other jurisdictions,” said Moin Ladha, partner, Khaitan & Co.

An entity not in insurance can invest overseas in general and health insurance if such a business supports the core activity of the Indian outfit.

The same relaxation has been given for investment in GIFT City, where an entity not in financial services can invest in a foreign outfit registered with the International Financial Services Centres Authority.

“Opening up financial services for investment by non-financial entities and the relaxation provided for investment in GIFT City will create new opportunities for funds and fintech start-ups controlled from India,” said Bhavin Shah, partner, PwC.

The issue of control

The regime has defined “control”. Holding less than 10 per cent in an overseas entity is, inter alia, not considered “control” but has been put under portfolio investment and permitted.

Earlier, there was no threshold for investment in the unlisted space. The rules also exempt entities from the mandatory reporting requirement except in the case of equity capital in a foreign unlisted company. The reporting requirement had earlier led to compliance challenges, particularly because financial investors did not have the right to seek information from the target firm overseas, Ladha pointed out. 

In the case of equity capital, the foreign entity’s annual performance report, certified by a statutory auditor, has to be submitted every year by December 31. Additionally, overseas direct investment has been given more flexibility by expanding the scope of the automatic route.

Issuing corporate guarantees to or on behalf of a second or the next-level step-down subsidiary (SDS) of an Indian entity does not require the Reserve Bank of India’s approval. It is now under the automatic route.

Similarly, acquiring equity capital in a foreign entity on a deferred-payment basis or any disinvestment involving write-offs beyond specified limits does not require approval.

Other than these, the new regime has introduced the concept of “strategic sector”, which gives the government the powers to permit overseas investment in excess of the limits prescribed under the rules.

“The strategic sector shall include energy, natural resources and such other sectors as may be decided by the government from time to time in view of the evolving business requirements,” it said. Besides, the new regulations have removed the cap for money remitted abroad. Earlier it was $1 billion per year or 400 per cent of the net worth. However, the percentage criterion remains unchanged.

Earlier, the RBI was of the view that money transferred overseas through the ODI route could be used only for bona fide purposes.

Easing investment route

• FinMin notification eases compliance, streamlines foreign investment structure 
• Allows portfolio investment in unlisted companies
• Sets 10% threshold for investment in unlisted foreign companies
• Defines control, disinvestment to ease compliance 
• Eases reporting requirement, except equity capital in unlisted foreign entity 
• Introduces strategic sectors such as energy and natural resources
• Allows certain investments under automatic route, which were earlier through approval route