Hits and misses in RBI’s draft regulations, 2021 governing overseas investments

The Reserve Bank of India’s (RBI) draft rules/regulations, 2021 on ‘overseas investments’ and ‘non-debt instruments – overseas investments’ have interesting bearing on the norms governing business.

Financial commitment

A condition for undertaking financial commitments on behalf of a foreign entity is that the Indian entity has made equity investment and also acquired control in such foreign entities. This could pose challenges in cross-border transactions, as certain circumstances pursuant to an M&A/joint venture transaction could require stakeholders to agree to provide financial support and commitment for the business. For instance, for an Indian stakeholder who has a significant stake in the business but does not have control, the inability to make a financial commitment may be reason for concern.

In order to reckon the financial commitment limit, the considerations are: investment in the foreign entity’s equity capital; lending or investment in debt instruments issued by the foreign entity on an arm’s-length basis; and guarantee commitments, including corporate guarantee/performance guarantee/personal guarantees and bank guarantees, as well as pledge or charge over the Indian entity’s assets. In respect of guarantees, it is clarified that personal guarantees will count towards the Indian entity’s financial commitment; and where a guarantee is invoked, to that extent, the same shall be considered as lending and not as a non-fund- based commitment.

ODI and OPI defined

Overseas Direct Investment (ODI) is defined to mean acquisition of equity in an unlisted foreign entity, or subscription to a foreign entity’s memorandum of association, or investment in 10% or more of a listed foreign entity’s paid-up equity capital, or where the Indian investor has or acquires control, directly or indirectly, in the foreign entity. 

Overseas Portfolio Investment (OPI) means investment, other than ODI, in foreign securities, including units of exchange-traded funds and depository receipts that are listed on a recognized stock exchange outside India but not in securities issued by a person resident in India (outside an IFSC).

Whereas ODI is counted towards financial commitment, OPI is not included.

An Indian resident may make or hold overseas investment by way of acquisition of sweat equity shares, qualification shares, or shares/interest under an ESOP, and such acquisition shall be treated as ‘OPI’ if the shares/interest acquired by such an individual does not exceed 10% of the foreign entity’s paid-up capital/stock. 

Pricing norms governing overseas investments

Any issue or transfer of foreign equity capital from (i) a person resident outside India to a person resident in India, or (ii) a person resident in India to another person resident in India, or (iii) a person resident in India to a person resident outside India will be subject to pricing norms. In the case of listed foreign securities, the price has to be in accordance with the host country’s concerned stock exchanges. In the case of unlisted foreign securities, the price has to be within 5% range of the fair value arrived on an arm’s length basis as per any internationally accepted pricing methodology. The valuation should be certified by a registered valuer as per the Companies Act 2013 or a valuer registered with the regulatory authority in the host jurisdiction to the satisfaction of the AD (Authorized Dealer) bank, and the certificate should be dated no more than six months before the transaction date.

Bona fide and non-tax avoidance/evasion test 

The draft regulations stipulate that any investment made by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or through a step-down subsidiary. Bona fide business activity is defined to mean any business activity legally permissible both in India and the host jurisdiction. 

It is also specified that an Indian resident’s financial commitment in a foreign entity that has invested or invests in India that is designed for the purpose of tax evasion/tax avoidance at the time of making such financial commitment, or at any time thereafter, either directly or indirectly, is not permitted, and any contravention under this rule shall be considered a serious violation.

A combined reading would bear out that where the investment is a bona fide one and not designed for tax evasion/tax avoidance, there will be no over-arching round tripping concerns.


An Indian resident may acquire overseas investment, without limit, by way of inheritance from a person resident in India or from a person resident outside India. However, any such gift from a person resident outside India is permissible only if the said person is a relative as defined, and subject to the limit stipulated, by the RBI. 

The road ahead

The proposals in the regulatory framework indicate RBI’s intent to promote ease of doing business. Once finalized and notified, these regulations should help all stakeholders to structure their investments and related matters with greater clarity and certainty.



Views expressed above are the author’s own.



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