Mumbai: The Reserve Bank of India (RBI) is picking the minds of bankers to smarten the overseas investment (OI) regime.
Senior regulatory officials held a meeting with half a dozen top private and MNC banks a fortnight ago, sparking hopes that the government and the central bank would finally clear the fog on some of the rules and lower the compliance hurdles that dog the framework for overseas direct investments (ODI), persons familiar with the discussion told ET.
A domestic company can invest up to four times its net worth (or, $1 billion, whichever is lower) as ODI to either incorporate or acquire a foreign company, subject to dos and don’ts-some coded, some imposed informally. For instance, although allowed under rules, corporates, planning a foreign financial services entity, often run into a wall. Also, a local non-banking finance company (NBFC) can chip in not more than its net-owned fund in owning an offshore NBFC, and is barred from investing in businesses which are not financial services.
The banks offered several suggestions-some to simplify procedures while others linked to policies. Practitioners advising companies and individuals say authorities should make things easier.
“This is an excellent initiative and RBI should take this opportunity to review certain procedural and contentious issues pertaining to OIs. An Indian resident investing a tiny amount in the equity of an unlisted foreign company is compelled to treat it as an ODI which involves reporting formalities and submitting a valuation report to the bank. It’s a practical challenge, especially when the investor can’t access the complete financial information of the foreign company,” said Vihal Gada, founder and CEO of Aurtus, a boutique firm offering tax, transaction, and regulatory services. Ever since super-wealthy Indians developed a taste for overseas investments-either to grow the business or save for the GenNext-several issues have cropped up. While a company is barred from trading in foreign real estate but is allowed to construct properties to lease them out, why can’t it acquire properties abroad to lease them out or invest in service apartments?
A RAFT OF ISSUES
“Or, can an Indian entity in a non-financial services sector create an investment company, loosely called family office, outside India under the “ODI-Financial services sector” automatic route as per the August 2022 rules. It is imperative that RBI, being the administrative body, influences the government to carry out necessary amendments to ease outbound investments. Also, RBI should proactively clarify for Indian investors and advisors to take a consistent stand,” said Gada.
While RBI’s views on OIs are significant, the central bank’s role is largely confined to administering the regulations-having lost the power in 2019 to frame policies on non-debt overseas investment which since then are decided by New Delhi.
Many believe ambiguities and unofficial curbs exist to discourage outflows. While rules don’t restrict a local manufacturer from floating a foreign NBFC, many banks spike the proposal. This, purportedly, followed feelers from RBI when a large corporate house floated a foreign family office.
At the meeting, some banks suggested a minimum interest on loans given by a resident to a non-resident. “The rule to audit overseas companies acquired as ODI is onerous-particularly where audits for small unlisted entities are not compulsory. Some banks insist on foreign auditors which can be expensive,” said another banker.
There are a slew of issues corporates think RBI should pursue. Individuals who remitted $250,000 abroad buying listed stocks under the RBI’s Liberalised Remittance Scheme, cannot invest the proceeds (from the sale of stocks) as ODI in unlisted shares.
Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co, said, “RBI recently proposed letting unregistered Type-I NBFCs (with less than ₹1,000 crore assets) to invest in overseas non-financial sectors, but insisted on RBI registration and approval for investments in foreign financial services entities.
This is odd as the draft FAQ notes that systemic risk concerns are not relevant for such NBFCs. Instead, appropriate safeguards can be applied to such investments.”
“Also an Indian resident who is directly hired by a foreign parent company as a consultant, and not employed with its Indian subsidiary, is not eligible under the OI rules to acquire shares of the parent under its ESOP scheme,” said Bhuta.
