How ODI’s Revised Regulatory Framework Boosts India Inc’s Aspirations to Become a Global Player


Despite lingering geopolitical concerns, high commodity and oil prices and other headwinds that pose near-term risk, India’s economy has remained strong and held up better than expected. This can be attributed to strong fundamentals and stable domestic demand, as well as strong structural reforms and timely government policy interventions aimed at promoting the ease of doing business. (Source: IBEF) Supported by this stability in domestic market conditions and the need for easier access to technology, R&D, a wider global market and lower cost of capital, more and more Indian companies seek to expand their global footprint.

In line with the simplification and rationalization of foreign exchange regulations undertaken in recent times, the recent notification of the liberalized framework for foreign investments (New OI framework) by the government in conjunction with the Reserve Bank of India (RBI), is expected to work as a catalyst for increased overseas investment by India Inc. The new OI framework has simplified the compliance burden for Indian investors and placed various transactions under automatic control. itinerary, which previously required prior approval from the RBI. Some of the key relaxations of the new OI framework are highlighted below.

  • New definitions and clarification of concepts

Certain concepts such as “foreign entities”, “Indian entity”, “control”, “subsidiary”, “foreign direct investment”, “foreign portfolio investment”, “financial commitment”, “strategic sectors” , “good faith business activity”, “financial services” and “net worth” have been defined under the new IO framework to provide consistency in interpretation and clear rules of engagement for stakeholders. That said, some aspects still need to be clarified.

      • Non-financial services companies in India are now allowed to invest in the financial services sector (other than the banking and insurance sectors) under the automatic route, subject to the fulfillment of certain conditions.
      • The ODI-IDE structures (i.e. layers and foreign entity engaged in ‘bona fide business activity‘). This relaxation provides greater regulatory certainty for stakeholders when foreign investments end up in ODI-IDE structures.
      • To provide greater flexibility in structuring overseas transactions in line with global M&A practices, deferred payment of consideration and provision of indemnity by sellers has been permitted under the automatic route. subject to compliance with pricing guidelines and certain other conditions.
      • Conditionalities and eligibility criteria provided under the previous ODI framework for transactions involving delisting due to divestment of overseas investments have been removed. However, the requirements for any normal transfer of investment abroad under the new IO framework must be met. Foreign entity balance sheet restructuring due to accrued losses on a proportional basis has also been liberalized with related conditions.
      • An Indian entity that has an account declared NPA or classified as a voluntary defaulter or that is under investigation by a financial services regulator, CBI, ED or SFIO, is required to obtain a no objection from the Competent authority before making a financial commitment or divestment, instead of obtaining RBI approval (for similar situations under the former ODI). The concept of presumed consent has been incorporated if the authority concerned does not respond within 60 days.
      • Certain relaxations have been provided for in terms of financial commitment (other than through ODI and OPI) (“Debt”) by Indian entities. An Indian entity is now allowed to issue corporate or performance guarantees on behalf of its second or higher tier subsidiary without obtaining prior approval from the RBI. Indian companies with global ambitions and companies with existing overseas group structures stand to benefit from these relaxations in terms of better access to debt financing under the new OI framework. However, one should also bear in mind the restrictions and conditions of financial commitments (other than ODI and OPI) of an Indian entity that have been stipulated in the new IO framework.
  • Other Important Changes
    • The concept of “late submission fee” (LSF) has been introduced in case of late filing (up to 3 years from the due date), which can be regularized upon payment of the prescribed LSF. No other financial commitment is authorized if the delay in the communication of information has been regularized.
    • Any issuance or transfer of foreign shares involving an Indian resident, unless exempted, is subject to pricing on an arm’s length basis taking into account internationally accepted pricing methodology. AD banks must implement a policy within 2 months, which among othersprovides guidance on meeting arm’s length pricing requirements and scenarios where a valuation is not required.

The government has underlined its positive intention to make it easier for India Inc. to conduct business overseas, through a host of key changes, relaxations and clarifications under the new OI framework. However, India Inc should be aware of some areas that require further clarity, including the applicability of the two-tier restrictions on subsidiaries, additional requirements for ODI-FDI structures (if any), scope of business activities in good faith and the determination of starting overseas. UPS. Any regulatory clarification on these matters, whether through FAQs or guidelines from RBI or AD Banks, will be welcome. Since the responsibility for ensuring compliance with the new OI framework lies primarily with AD banks, it remains to be seen whether AD banks will take a pragmatic approach when dealing with overseas investment transactions.



The opinions expressed above are those of the author.



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