Changes In Overseas Investment Rules Leave Angel Investors in Disarray

overseas investment rules leave angel investors with more compliance burden

SUMMARY

Investments in foreign companies can either be made by the ODI route or the OPI route, but the latter is limited to investments in listed companies

Earlier, Indian angel investors were writing cheques under the Liberalised Remittance Scheme (LRS), which did not entail much compliance

Under the ODI route, investors are required to furnish several documents to the RBI, including the valuation report and statutory audit reports

The increased compliance burden due to the recently notified updated overseas investment rules and regulations has made it harder for angel investors to fund startups based abroad.

Authorised banks have insisted that such investments should only come under the overseas direct investment (ODI) window. Earlier, Indian angel investors were writing cheques under the Liberalised Remittance Scheme (LRS), which did not entail much compliance.

However, under the new overseas investment rules, investments in foreign companies can either be made by the ODI route or the recently introduced overseas portfolio investment (OPI) programme. Yet, the OPI route only allows investors to invest in listed companies and hence, this route is of no use to angel investors.

The Reserve Bank of India (RBI) notified the new regulations in August this year, in a bid to simplify the investment process in overseas companies.

Inc42 reported at that time that the new overseas investment rules might help ease mergers and acquisitions in the startup ecosystem. Our analysis also noted that the new regulations might increase the remittances to India as well.

Under the ODI route, investors are required to furnish several documents to the RBI, including the valuation report and statutory audit reports. However, the target companies might be unwilling to share such information with angels who typically buy a small stake in a startup.

For angel investors, however, this means they will have to hire entire teams to help with compliance and paperwork under the ODI route. This increases the overall cost of compliance which is hard to justify when compared with the size of the investment.

The ODI route only makes sense for large funds and companies which are making significant investments (to the tune of tens or hundreds of millions of dollars), while the OPI route only makes sense for investing in foreign-listed stocks.

Therefore, there is no room for angel investors without going through the compliance-heavy ODI route, which might also end up increasing the time it takes for the investment to hit a startup’s account.