RBI Notifies Overseas Investments Rules For Indian Investors; Likely To Ease Startup M&As

After mulling changes for nearly a year, the RBI notified updated overseas investment rules and regulations on August 22, 2022. The new regulations and directives bring a host of changes that simplify the existing framework of overseas investment by Indian investors. These include family offices, Indian conglomerates and tech startups, opting for the overseas direct investment route (ODI) into listed and unlisted companies.

“The new regime simplifies the existing framework for overseas investment by persons resident in India to cover wider economic activity and significantly reduces the need for seeking specific approvals. It will reduce the compliance burden and associated compliance costs,” an RBI spokesperson said in a circular.

The existing rules allowed Indian investors and entrepreneurs to invest in overseas unlisted companies. However, such companies could not create subsidiaries in other countries (including India). 

RBI had also previously disallowed Indian companies to acquire or invest in a foreign entity that already had a direct or indirect investment in the Indian market (also known as round-tripping structures). Now, round-tripping structures do not require approval from the reserve bank if the investee involves less than two levels of subsidiaries.

With the current regulations, the apex bank has updated the definition for overseas portfolio investment (OPI), making it clear that Indian companies (listed as well as unlisted) can invest in foreign listed companies. After the delisting, the investment will continue to be treated as OPI until further investment is made, which will be treated as overseas direct investments (ODI).

RBI has also dispensed the approval requirement for investment or disinvestment by an investor under investigation in India. It has allowed the issuance of corporate guarantees to (or on behalf of) second or subsequent level step-down subsidiaries (SDS). 

The move is likely to impact the merger and acquisition decisions of Indian startups when previously, overseas investments were not friendly with modern businesses requiring foreign subsidiaries. Startups expand based on subsidiaries in new markets, and existing regulations deterred potential investments in such companies that otherwise looked for the Indian investor’s network to open up shop in India. 

To simplify foreign investments, SEBI has recently removed the clause that an investee company needs to have an Indian connection. Now, AIFs can invest in securities of companies incorporated outside India, as VCs can conditionally invest in off-shore venture capital companies.

Last year, SEBI also doubled the ceiling of investors to $1.5 Bn to reinvest their sales proceeds in foreign companies (up from $750 Mn until 2021). The market regulator is also reportedly discussing with the RBI to double the limit to $3 Bn.