Entities Can Make Overseas Investment Beyond Prescribed Limit In Strategic Sectors: Finance Ministry

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New Delhi: The government on Tuesday said that an Indian corporate entity can make overseas investments beyond the prescribed limit in strategic sectors like energy and natural resources after obtaining necessary permissions. Releasing an explanatory note on Overseas Direct Investment Rules and Regulations 2022, the finance ministry said a non-financial sector entity can make a direct investment under an automatic route into a foreign entity engaged in financial services activity (except banking and insurance).

The earlier regime did not permit Overseas Direct Investment by a non-financial sector Indian entity into a foreign firm engaged in financial services activity. "An Indian entity not engaged in the insurance sector may make Overseas Direct Investment in general and health insurance where such insurance business is supporting the core activity undertaken overseas by such an Indian entity," it said. ()

The government on Monday issued two gazette notifications in which Overseas Direct Investment and Overseas Portfolio Investment have been demarcated. In the earlier regulations, Overseas Portfolio Investment was not clearly defined. The other terms such as Control, disinvestment, step down subsidiary and financial services activity, among others, have also been defined. ()

The note further said a new concept of the strategic sector has been introduced under the new regime where the government would have the powers to permit Overseas Investment in excess of the limits provided in the Overseas Investment 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 added.

The new regime has proposed that the approval route items would now be allowed under the automatic route. Under the earlier regime, issuance of corporate guarantees to or on behalf of second or subsequent level step-down subsidiary (SDS) of an Indian entity required the Reserve Bank’s approval, it said, adding the new regime brings this under the automatic route.

Any disinvestment involving write-off beyond the specified limits required prior approval from the Reserve Bank. The new regime brings such transactions under the automatic route, subject to the provisions contained in Overseas Investment Rules and Regulations, the finance ministry said. Under the new regime, it said, the acquisition of equity capital in a foreign entity on a deferred payment basis has been permitted under the automatic route that was earlier under the approval route.

An Indian entity that is not engaged in financial services activity in India, may make Overseas Direct Investment (ODI) in a foreign entity in International Financial Services Centre (IFSC), which is directly or indirectly engaged in financial services activity, except banking or insurance although it does not meet the net profit condition as required under these rules, it noted.

With regard to compliance burden, it said, the new regime also introduced the facility of late submission fee for filing various overseas investment-related returns/ documents on lines similar to that for Foreign Investment and External Commercial Borrowings related transactions. This would significantly ease meeting compliance requirements, the ministry said.

The separate reporting requirements for setting up/winding up of step-down subsidiaries or alteration in the shareholding pattern of the foreign entity have now been dispensed with, it added. "In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is a need for Indian corporates to be part of the global value chain.

"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 finance ministry said while issuing these notifications on Monday.

Clarity on Overseas Direct Investment and Overseas Portfolio Investment has been brought in and various overseas investment-related transactions that were earlier under approval route are now under the automatic route, significantly enhancing 'ease of doing business, it had said.