The document summarizes key changes brought about by India's new Overseas Direct Investment Guidelines. It introduces definitions for key terms like foreign entity, overseas direct investment, and overseas portfolio investment. It liberalizes regulations by removing restrictions on investment write-offs and allowing more entities like unlisted companies and individuals to undertake overseas investments. The guidelines also expand the scope of permitted overseas investments in sectors like financial services. Overall, the changes aim to simplify regulations and promote ease of doing business for overseas investments by Indian persons and entities.

1. Overseas Direct Investment
Regulations 2022.

2. Introduction:
Presently, the overseas investment by a person resident in India is governed by the 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.
With a view to liberalise and simplify the regulatory framework on overseas investments and to
promote ease of doing business, the Central Government has issued the Foreign Exchange
Management (Overseas Investment) Rules, 2022 (“ODI Rules”). The Reserve Bank of India (“RBI”)
has also simultaneously issued the Foreign Exchange Management (Overseas Investment)
Regulations, 2022 (“ODI Regulations”) and the Foreign Exchange Management (Overseas
Investment) Directions, 2022 (“ODI Directions”).
The OI Rules, OI Regulations, and OI Directions (hereinafter collectively referred to as the "OI
Guidelines") have been notified with the intention of updating the current regulatory framework in
relation to overseas investments and the purchase of real estate outside of India. They have been
notified in replacement of the Foreign Exchange Management (Transfer or Issue of any Foreign
Security) (Amendment) Regulations, 2004, Master Direction - Direct Investment by Residents in Joint
Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad and the Foreign Exchange Management
(Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 (Previous ODI
Regime).

3. Few Key Changes Brought About Under The ODI Guidelines:
Foreign Entity
• A “foreign entity,” which is defined as an entity founded, registered, or incorporated
outside India, including in the International Financial Services Centre (IFSC) in
India, has taken the place of the notions of joint venture (JV) and a wholly owned
subsidiary (WOS). The concept of limited liability has been introduced, where the
liability of the person resident in India is clear and limited. This definition is
conceptually similar to the definitions of “JV” and a “WOS.” The obligation of the
person residing in India must be obvious, limited, and not exceed the interest or
contribution in the fund in the case of a foreign entity that is an investment fund or
vehicle and established as a trust outside India.
Overseas Direct
Investment
(hereinafter referred
to as the “ODI”) and
Overseas Portfolio
Investment
(hereinafter referred
to as the “OPI”)
• The OI Guidelines clearly distinguish between the types of foreign investments that
make up ODI and OPI. According to the new regulations, ODI refers to any of the
following:
• (a) the acquisition of any unlisted equity capital or subscription as a part of the
memorandum of association of a foreign entity;
• (b) investment in 10% or more of the paid-up equity capital of a listed foreign entity;
• (c) control investment where investment is less than 10% of the paid-up equity
capital of a listed foreign entity.

4. Control and
Subsidiary/Step
Down Subsidiary
• The acquisition of 10% or more of the voting rights of a foreign corporation has
been added as a benchmark to establish control under the ODI Rules’. This is
crucial for determining which entities might be considered subsidiaries or step-down
subsidiaries of foreign entities, which refer to any entities over which the foreign
entity has influence.
• According to the ODI Rules, each subsidiary/step down subsidiary must have a
structure that complies with the structural criteria of a foreign corporation, which
includes having limited liability in cases where the foreign entity’s primary business
is not in the strategic sector.
• The idea of control, which is associated with 10% of the voting rights, is also
pertinent to identifying an ODI investment, determining whether a resident person is
eligible to invest in a foreign entity that has subsidiaries, and determining whether
restructuring an existing investment is permitted.
Strategic sector
• A strategic sector is any other sector that the Central Government notifies and is
generally related to energy and natural resources, such as mineral ores, submarine
cable systems, oil, gas, and coal, as well as start-ups.
• The ODI Rules substitute the term JV and WOS with Foreign Entity that comprise of
entities with limited liability, formed or registered or incorporated outside India or in
an IFSC, and of unincorporated entities with core activities in strategic sector.
• The ODI Directions further explain that the underlying condition is that the liability of
Person Resident in India (“PRII”) should be clear and limited. Through this clause,
the Central Government has taken a step to prioritise foreign industries for foreign
direct investment in specific sectors.

5. Bonafide business
activity
• Only foreign entities that conduct legitimate business activities i.e., those permitted
by laws in force in India and the host country or host jurisdiction, as the case may
be is allowed to engage in ODI.
The ODI Guidelines
defines OPI
• OPI is defined as any foreign investment that is not an ODI, except investments in
unlisted debt instruments and securities issued by Indian residents who are not
located in an IFSC.

6. Key provisions regarding undertaking overseas investment:
Statutory recognition of ODI-FDI structures
• Investment in any foreign entity is expressly prohibited by the new ODI Rules if the foreign entity has a step-
down subsidiary in India that is connected to control under the ODI Rules, and if such investments result in a
structure with more than two layers of subsidiaries.
Ease of transfer and divestment of overseas investments
• The Previous ODI Regime imposed a number of conditions and eligibility requirements regarding the transfer
and divestment of ODI by way of a write-off or where the divestment proceeds were less than the original
investment amount, including that the foreign JV/WOS be listed on a foreign stock exchange, that the Indian
party have a prescribed net worth, and that the investment size in the JV/WOS be a prescribed amount.
• The ODI Guidelines have eliminated any individual restrictions and conditions on investment write-offs as long as
the write-off is done in accordance with the fair market value for the foreign entity determined using an
internationally recognised valuation methodology. This shows that the Central Government and the RBI have
loosened up business procedures and are allowing market forces to take their course.

7. OPI by all Indian entities and resident individuals
• Investment in foreign entities in the financial services sector – Under the ODI Rules, an Indian entity
not engaged in financial services activity in India is now allowed to make direct investment under the automatic route
in a foreign entity engaged in financial services activity (except banking and insurance). Such entities must meet the
condition of posting net profits in the preceding 3 financial years. An exemption has been provided for COVID-19
years, 2020-21 and 2021-22, which permits the Indian entities to exclude these years from the 3-year profitability
period.
• Unlisted companies allowed to undertake OPI – Indian unlisted companies were excluded from
undertaking OPI in the erstwhile regime. Now, an Indian unlisted company may make OPI by way of: (a) acquisition
of equity capital (rights issue or bonus shares); (b) capitalisation of any amount due towards the Indian entity from
the foreign entity, the remittance of which is permitted or does not require prior permission; (c) the swap of securities;
and (d) merger, demerger, amalgamation or any scheme of arrangement as per the applicable laws. It is also
relevant to note that "swap of shares" has been substituted with "swap of securities" in the ODI Rules, which will
allow Indian entities to swap securities other than shares.
• ODI by resident individuals- Under the ODI Rules, a resident individual may make or hold ODI in an operating
foreign entity not engaged in financial services activity and which does not have a subsidiary or a step down
subsidiary, where the resident individual has control in the foreign entity. However, ODI may be made by a resident
individual in respect of (i) inheritance; (ii) acquisition of sweat equity shares; (iii) acquisition of minimum qualification
shares issued for holding a management post in a foreign entity; and (iv) acquisition of shares or interest under
Employee Stock Ownership Plan (ESOP) or employee benefits in a foreign entity whether or not such foreign entity
is engaged in financial services or has a subsidiary or step down subsidiary where the resident individual has
control.

8. Investment in financial services sector
• According to the ODI Guidelines, any Indian entity, whether or not it conducts financial services activity domestically,
may invest in a foreign entity that is either directly or indirectly engaged in the financial services industry. An Indian
entity, which is not in the financial services industry may invest in a foreign entity subject to the condition that it has
made net profits over the previous three fiscal years , which was not allowed under the previous ODI regime.
• In cases of ODI based on sweat equity, qualification shares, shares acquired through an employee stock option
plan, or any other employee advantages, resident Indian individuals may also invest in such foreign firms. The ODI
Guidelines also provide that if a foreign entity engages in an activity that, if carried out by an Indian organisation,
would require registration with or be subject to regulation by an Indian financial sector regulator, it will be deemed to
be involved in the business of financial services.
Overseas investments by mutual funds, VCFs and AIFs
• For overseas direct investments by mutual funds, several conditions were included under the previous ODI regime.
Additionally, only domestic VCFs and AIFs were allowed to engage in the stock and equity-linked instruments of
offshore venture capital enterprises, subject to overall restrictions of USD 500 million.
• While mutual funds have been allowed to make investments abroad up to a total limit of USD 7 billion, the ODI
Guidelines do not contain specific requirements for such an investment. A total investment cap of USD 1 billion
applies to all AIFs that have registered with SEBI. The SEBI has the authority to supervise any such investments
made by mutual funds, VCFs, and AIFs and to impose any extra restrictions.

9. Overseas investments in International Financial Services Centre (IFSC)
• The offshore investments in IFSC may be made by resident Indians and Indian businesses in conformity with
the guidelines outlined in the ODI Rules. The ability of resident persons to invest abroad in IFSC is restricted if
the relevant foreign entity has a subsidiary or step-down subsidiary outside the IFSC that the resident
individual controls.

10. Other Key developments:
Lending, investment into debt or non-fund
based commitments
The ODI Guidelines have added a further requirement
that must be met by an Indian entity before it can lend
money to, invest in debt securities, or make any other
non-fund based commitment to, a foreign entity.
This requirement relates to gaining control over the
foreign entity at the time the financial commitment is
made. However, non-fund based obligations (like
guarantees) may now be made on behalf of any foreign
company or step down subsidiary under the OI
Guidelines.
Clarity in relation to existing concepts
According to the ODI Directions, any redeemable, non-
convertible, or optionally convertible instrument will be
regarded as debt for the purposes of the ODI Guidelines.
The ODI Directions, however, also state that residents
are not allowed to use debt as a form of financial
obligation.
Net worth - the corresponding definition under the
Companies Act, 2013 will apply, resolving the perennial
concern that the share premium shall be taken into
account in the calculations; and
Equity capital, debt instruments, and non-debt
instruments - equity capital being clearly defined as
equity shares, perpetual capital or instruments which
are irredeemable or contribution to non-debt capital in
the nature of fully and compulsorily convertible
instruments. Exhaustive lists of debt instruments and
non-debt instruments have been set out in the OI Rules.

11. Impact Of New Odi Regulations:
Statutory recognition of ODI-FDI structures is a ground-breaking breakthrough since
it lets foreign direct investment back into India after an abroad investment, subject to
a two-layer limit .
The ODI Rules and ODI Regulations have considerably simplified the Overseas
Investment framework in India which was riddled with ambiguities.
On continuity of investments, the ODI Rules state that any investment or financial
commitment outside India made in accordance with the Act (or the rules or regulations
made thereunder) and held on the date of publication of the ODI Rules, shall be
deemed to have been made under these ODI Rules and ODI Regulation
1.The new Regulations have reduced the need for approvals, disclosures and
compliances, and automated several actions. For instance, the RBI has
introduced a ‘late submission fee’ in case of reporting delays.
The new regulations also ease the round-tripping structure which earlier restricted
Indian investors and companies from setting businesses outside India. It seems a
welcome move to enable Indian businesses to invest in global companies having an
Indian presence

12. The new rules outline points that will help Indian startups expand overseas, build
businesses in partnerships with foreign startups and allow investors to expand their
portfolio.
The ODI Guidelines have simplified the regime on overseas investments and
provided much-needed clarity on certain concepts including in relation to ODI-FDI
structures, control, modes of investment by a resident individual natural person
and allowing deferred payments..
The grandfathering of investments made under and in accordance with the
Previous ODI Regime has been of much relief to resident investors.
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.
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. 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

13. Gaps that remain or unresolved issues in the ODI Sector:
Concepts including bonafide business activities, business of financial services, the impact of the
FCRA on gift structures and investments in optionally convertible or redeemable instruments
requires further clarity.
Few of the amendments w.r.t meaning of control, layers of subsidiaries are ambiguous and may
either result in a hurdle or a loophole, depending on the objective.