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How RBI’s latest disclosure can change the regulation of investment for angel investors

The Reserve Bank of India (RBI) recently revised rules for Overseas Direct Investment (ODI), which gave investors much-awaited clarity on overseas investments. The rules will impact tech startups, Indian conglomerates, and family offices looking for ODI in companies abroad. It would help them grow internationally, build businesses with new businesses in other countries, and add to their portfolio.

It is worth noting that India remitted over $6 billion in overseas direct investments in the second quarter (Q2) of 2022, a decrease of more than 60% from the same period last year. The new regulations lay out specifics that will aid Indian firms in growing internationally, creating joint ventures with startups abroad, and enabling investors to diversify their holdings despite any overlaps. The laws will impact family offices, Indian conglomerates, and tech startups choosing ODI in foreign listed and unlisted firm offices. Let us take a look at this new regime.

The Revamped Overseas Investment Regime

Investors had been confused due to a lack of definitional clarity in the law regarding overseas investments. The new rules have revamped these definitions. Overseas investment can now broadly fall into two, mutually exclusive buckets: overseas direct investments (ODI) and overseas portfolio investments (OPI). The RBI has imposed a 10% ceiling for Indian corporations to back foreign startups under ODI and introduced the distinction of OPIs.

The new regulations also make it easier for Indian investors and businesses to set up operations outside of India, which was previously prohibited. An Indian resident can give money to a foreign company that has invested in an Indian company if the investment doesn’t lead to a structure with more than two levels of subsidiaries.

According to previous guidelines, Indian corporations could not buy or invest in a foreign entity that had previously made a direct or indirect investment in an Indian company.But the new rules, like the round-tripping structure, as it is more often called, will not require central bank permission if the investee business has fewer than two levels of subsidiaries. It enables Indian investors and promoters to use ‘flip’ arrangements, which are becoming increasingly common in the Indian startup environment, particularly among tech startup companies. 

The important economic and regulatory developments relevant to equity investments have been highlighted by the updated RBI regulations. These include the following:

  • Definitions of “portfolio investment” and “direct investment” were made clearer, and investors were given access to a wider range of securities
  • Justifying investment limitations in offshore financial services
  • A new classification distinguishes equity instruments from non-equity instruments.
  • Allowing securities swaps, greater access to offshore capital
  • Changes to ‘net-worth’ raise investment limitations
  • Payments may be deferred: Indian investors who purchased shares through the ODI method and received all of the equity upfront may postpone payment, subject to applicable price standards

Advantages for Indian Businesses and Investors

Previously, only RBI-registered NBFCs were permitted to make overseas investments in international fintech or financial services companies. Most investors were either ineligible for an NBFC license or faced stringent compliance requirements. The new regulations, with certain exceptions, make it easier for individuals or businesses to back international companies registered with the International Financial Services Center (IFSC). There are a few important exceptions, such as inheritance, getting shares through sweat equity or minimum qualifying shares, and ESOPs.

A non-fintech company in India may invest in an overseas fintech company if the latter has made a profit in the previous three fiscal years. The RBI stated that an Indian entity that does not meet the three-year profitability criterion may play such an ODI with a foreign entity in IFSC in India. The laws also limit investment to four times the Indian company’s profit. Additionally, a foreign company will only be regarded as a supplier of financial services if its Indian investment participates in the same activity. He or she is required to register with an Indian financial sector regulator or fall under the authority of one.

Large corporations or investors can make an overseas investment by investing in equity capital to conduct legitimate business. Also,RBI rules say that an Indian company’s total financial commitment to all foreign companies can’t be more than 400% of the company’s net value.

Opening The Path For Fintech Players

The New ODI Norms are designed to make doing business more convenient and to reduce the need for RBI approvals, which will encourage Indian businesses and individuals to invest abroad. Some of the issues that have long plagued the old ODI norms are addressed by these changes to the foreign investment regime.

With the mentioned improvements in situ, it is safe to assert that the government has implemented reforms to relieve both ODI and FDI outflows. But some parts of the restrictions on investing abroad are still unclear, and lawyers are waiting for more clarification from the RBI.

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Disclaimer

Views expressed above are the author’s own.

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