The RBI’s new restrictions on overseas investments might be beneficial for small-scale Indian investors looking to invest abroad.

The Reserve Bank of India (RBI’s) released new regulations on August 22, 2022, to make it easier for Indian individual investors to access foreign shares, real estate, and other investments. The newly established structure and instructions are made up of Rules (produced by the central government), Regulations, and Directions (issued by RBI).

Retail investors who intend to acquire real estate or make investments outside of India should be aware of the following important changes. In order to invest abroad, Indian investors mostly use two types of investment avenues: overseas direct investment (ODI) and overseas portfolio investment (OPI). Under the old regulations or directions, there was no evident distinction between OPI and ODI.

OPI was not defined, and it was not made clear under ODI what proportion of stock ownership would need to be purchased for the transaction to be regarded as ODI/OPI. Regular investors found it challenging to determine whether their investments in foreign firms were OPI or ODI that required ODI compliance.

How updated definitions benefit small-cap investors

The following modifications for resident retail investors making international investments emerge from the specific definitions of ODI and OPI under the new overseas investment rules:

Equity investment by resident people or corporations in an unlisted foreign entity will be considered ODI even if it is less than 10%, with or without control. To make an ODI investment, a person must adhere to ODI compliances. These include filing the newly developed Form FC and submitting the Annual Performance Report (APR) in the Form APR on an annual basis.

Before making the investment, Form FC must be sent to Authorized Dealer Bank (AD Bank). It includes information on the investor, a foreign entity, investments, and so forth. Each year, on or before December 31st, AD Bank must receive Form APR, which provides the financial information of a foreign firm.

Now, the acquisition of a 10% or larger controlling stake in a publicly traded foreign company by a resident individual or corporation will also be regarded as an ODI. The applicant must thus supply the exact same documents that were mentioned earlier.

With the introduction of the new overseas investment legislation, ordinary investors are no longer authorized to subscribe to unlisted government debt instruments or bonds under ODI and OPI restrictions. For any investment made by a resident investor in enterprises located in IFSC, the ODI/OPI rules and regulations must now be strictly obeyed (GIFT City in Gujarat).

Under the restrictions of the Liberalized Remittance Scheme (LRS), Indian individual investors will be permitted to participate in foreign stocks through the international exchange set up in the IFSC.

Under the previous rules, a resident may only receive a gift of foreign securities from a non-resident, a PIO, or an Overseas Cardholder Indian (OCI). The giving of foreign securities between two residents was not specifically addressed, though.

The updated overseas investment regulations now clearly state that an Indian resident may receive foreign stocks as a gift from another Indian resident who is a relative and who is holding them in line with FEMA without any restrictions.

Any resident Indian who is not defined as a “related” under the Companies Act is not authorized to accept gifts of overseas investments from friends or other relatives who are also residents of India.

An Indian resident’s direct investment in real estate outside of India

The New Framework now allows an Indian resident to purchase such property using income or the money from the sales of assets other than ODI that were purchased abroad under the terms of FEMA. The selling profits of immovable property outside of India, revenue from such property (rent, for example), sale proceeds from investments made under OPI, income from those investments, etc. can all be used by a resident Indian to purchase new immovable property outside of India. The previous laws did not permit this.

Under the prior immovable property limitations, an Indian resident could not buy a home beside an NRI relative. Only on the condition that the resident Indian did not send money back to India was joint ownership with an NRI relative permissible. However, this restriction has been eliminated thanks to new foreign investment legislation. As a consequence, locals are now able to send money up to the LRS limit (USD 2.5 lakh) to buy a home with an NRI relative. The linked must adhere to the Companies Act’s definition of that word.

Penalty for breaking new regulations

The Companies Act uses a more narrow definition of the word “related” than the Income-tax Act does. For instance, a spouse’s brother is regarded as a specified relative under the Income-tax Act but not the Companies Act. The Indian Income-tax Act, 1961 states that presents given from a certain relative to another are exempt from taxation. This includes donations of foreign securities.

The timelines for completing compliance under the new overseas investment regulations have not changed, it is important to remember. OPI investments are now subject to compliance standards, which were not previously mandated by the RBI.

In order to regularize a delay in reporting compliances under the previous ODI Regulations, Indian investors had to go through a compounding procedure with the RBI and pay the fine assessed by the bank, or they may pursue appellate remedies. According to the new overseas investment laws, there is an option to pay Late Submission Fees (LSF), a small fee as follows, to regularize a delay of up to 3 years in reporting Form ODI/Form FC/APR, FLA Returns, Form OPI, evidence of investment, or any other return.

This would now stop such reporting defaults from requiring costly and time-consuming litigation, which is a good step. The new overseas investment laws provide that an Indian individual who owns less than 10% of the equity in a foreign company, has no control over it, and has no other financial commitments outside of their equity investment is free from releasing an annual performance report. The compliance expenses for both the initial investment reporting in form ODI/form FC and the annual investment reporting in form APR will be reduced as a result.