10 Things To Know If You Are Investing Through The ODI Route In A Foreign Startup

OVERVIEW

If you have been planning to invest in a foreign startup or buy shares of foreign listed companies or buy immovable properties abroad, the Reserve Bank of India has made life easier for you by issuing new guidelines in August 2022. If you are looking for a ready checklist to understand the changes here you go.   1. Clarity between OPI and ODI The new regulations define Overseas Portfolio Investment and Overseas Direct Investment clearly. According to the new regulations Overseas Direct Investment is defined as including

• Investment in the equity of a foreign startup that is not yet listed on the stock exchange
• Subscriber to the Memorandum of Association of a foreign entity
• Investment of more than 10% of the paid-up capital in a listed foreign company (without control)
• Investment of less than 10% of the paid-up capital in a listed foreign company (with control)

An investment by an Indian Resident in the paid-up capital of a foreign entity, once classified as Overseas Direct Investment will continue to be classified as ODI even if the percentage falls below 10% or control is lost. On the other hand, Overseas Portfolio Investment refers to any investment other than ODI or other specified exceptions. For instance, if an Indian resident buys shares in a listed foreign company that is less than 10% of the paid-up capital with no control, it will be termed an OPI. Similarly, investments in listed debt instruments like foreign government bonds or debt instruments of foreign entities listed on the foreign stock exchange also fall under Overseas Portfolio Investments. The investment made by an Indian Resident in a listed foreign entity will continue to be treated as Overseas Portfolio Investment even if the entity is delisted till any frsh investment is made in that entity.  2. ODI Compliances An Indian Resident who has made an Overseas Direct Investment will be required to adhere to ODI compliances.  This will entail the submission of Form FC and the annual filing of Form APR. Form FC needs to be submitted to the Authorised Dealer (Bank) before making the investment. The form contains complete details of the investor, foreign entity, and details of investment  Form APR which contains the financial details of the foreign entity needs to be submitted to the Authorized Dealer before the end of the calendar year. This will include investments above 10% without control or below 10% with control for which the same forms will need to be submitted. 3. No subscription to Unlisted Government Bonds/Securities Retail investors can no longer subscribe to unlisted government debt securities/bonds. The new rules don’t allow this option for retail investors. 4. Investment in Entities located in GIFT City Those who wish to invest in entities located in IFSC must do so within the ODI/OPI rules and regulations. Indian residents can make investments in foreign companies via the international exchange which is set up in IFSC within the limits of the  Liberalized Remittance Scheme.  5. Investment in overseas Fintech Startups Investment in overseas fintech startups was not allowed under the old regulations but under the new rules, a non-fintech Indian company can invest in a foreign fintech startup. It can be done in profitable companies up to 4x profits. It can also invest in foreign startups registered with the International Financial Services Centre Authority. 6. General Permission for ODI According to the old regulations, ODI was permissible only from the funds held in a Resident Foreign Currency Account, bonus shares on existing holding of foreign shares or from foreign currency resources outside India only for NRIs. The new rules allow the use of cash reserves and profits of the existing company. However, there can be no borrowings or fundraising for overseas investment. 7. Rules regarding the gift of foreign securities The new rules offer specific provisions regarding the gifting of foreign securities between two resident Indians which was missing in the old regulations. The permits Indian residents to acquire foreign securities without any limit as a gift from another Indian resident who has been holding the same in compliance with FEMA. The new rules prohibit an Indian resident from receiving gifts of foreign investments from Indian residents or friends or relatives not defined in the Companies Act. This makes it a bit tricky because some relations are included under specified relatives in the Income Tax Act but not under the Companies Act. Gifts received from specified relatives are exempt from tax under the Income Tax Act.  8. Rules related to Investment in foreign Immovable property The new regulations allow Indian residents to buy foreign immovable property using the income or sale proceeds of assets other than ODI acquired in compliance with FEMA provisions. This is different from the old regulations which did not allow this investment without restrictions. The earlier regulation allowed an Indian resident to buy immovable property in joint ownership with an NRI relative only if there was no remittance from India by the Indian resident. Now, this rule has been relaxed and the Indian resident can remit up to USD 2.5 lakh for obtaining joint property with an NRI relative. “Relative” should meet the definition under the Companies Act. 9. Penalty for non-compliance The deadlines for meeting compliance under the new overseas investment rules remain the same as before.  The new rules have extended the compliance requirements for Overseas Portfolio Investments as well. The old rules required Indian investors to pay the penalty as per the compounding rules of the RBI to regularise the delay in reporting compliances.  The new rules have provided an option to regularise up to 3 years' delay in the filing of the various forms or in providing evidence of investment or any other return by making the payment of Late Submission Fees. In case of delay in submission of -

• Form ODI Part II, Form OPI, FLA Returns, evidence of investment or any other returns a fine of Rs 7500 would be applied.
• Form ODI Part I, Form ODI Part III, Form FC or any other return, a fine of Rs 7500 +(0.025%*A*n) would be applied.

This has made the process for reporting defaults quite simple. 10. Reduced compliance requirements The new rules don’t require the filing of the Annual Performance Report for an Indian Resident if they are holding less than 10% of the equity in the foreign company or if they have no control or if they do not have any financial commitment other than equity capital. In such cases, they will have reduced compliance requirements in form ODI/Form FC as well.   Wrap Up The new Overseas Direct Investment Rules have made it more convenient for Indian residents to invest in foreign entities or buy immovable property abroad. There is more clarity around several provisions and compliances. You can contact StartUp Movers if you need more clarity about Overseas Direct Investments or need help with meeting compliance reporting requirements. You can visit https://www.startup-movers.com/  or call on 7011808002