INTRODUCTION
In a move to bring lucidity to the instructions for Overseas Investors by persons resident in India and enhance the structure of implementation of Overseas Direct Investment, the Reserve Bank of India (‘RBI‘), on July 24, 2024, issued the Master Direction on Overseas Investment (‘Master Direction’) [1] in lieu of the powers conferred under Section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) (‘FEMA’) [2], read with Rule 3 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 (‘OI Rules’) [3]. This aims to lay down how authorized persons must conduct foreign exchange business with their customers/constituents to implement the OI Rules and the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (‘OI Regulations’) [4]. The issued Master Direction provides clear instructions on ‘Overseas Investments’ by persons resident in India and operational instructions to Authorized Dealer Category-I Banks (‘AD Banks’) for better implementation of ‘Overseas Investments’ under OI Rules/Regulations. Additionally, it defines different types of overseas investments, including Overseas Direct Investment (‘ODI’) and Overseas Portfolio Investment (‘OPI’); outlines explicit roles and responsibilities for AD Banks; and specifies caps for certain investment categories.
THE MASTER DIRECTION
The intent of the Master Direction was to provide for clearer directions to the AD Banks and to provide for broader framework for the already existing directions[5], providing for aspects like issuance of corporate guarantees to or on behalf of second or subsequent level step down subsidiary (‘SDS’); write-off on account of disinvestment; investment by persons resident in India under investigation among others. Further, with the Master Direction in place, it provides for a more comprehensive inclusion over what should be within the framework of OPIs, thus offering a clear demarcation for overseas investments.
The Master Direction is applicable to all the AD Banks and lays down how the foreign exchange business has to be conducted by AD Banks with their customers/ constituents for the better implementation of the OI Rules and OI Regulations. The Master Direction aims to clarify definitions, outline what counts as a strategic sector, and specify compliance requirements. This includes rules for issuing corporate guarantees for subsidiaries, writing off accounts due to disinvestment, and introducing a Late Submission Fee (LSF) for reporting delays, among other things.
Under the Master Direction, key efforts have been made to expand the definition concerning inter alia foreign entities, strategic sector, OPIs among others. At the same time, with the Master Direction in place, outlines a detailed approval process, with a much clearer reporting instruction when a person intends to make any financial commitments, and highlights what prerequisites should be placed for the AD Banks to approve such overseas investments. Additionally, while providing for restriction guidelines over financial commitment and transfer preventing unauthorized financial exposure, through this direction investment caps have been introduced to mitigate the risk of financial frauds and regulatory oversight.
KEY GUIDELINES
The intent of the Master Directions was to consolidate and update the framework for Indian resident investing abroad, streamlining the overseas investment process and providing for a robust regulatory framework under the Foreign Exchange Management (Overseas Investment) Rules and Regulation, 2022.
Thereunder, some key changes (as highlighted below) were introduced to offer a better regulatory compliance framework, and ensure that the interests of the investors remain intact.
| Sl. No. | Introduction | Description |
| Change in definition | The definition under the Master Direction has been revised to provide for a more robust definition to include: Foreign entity: The extant concept of Joint venture (“JV”) and Wholly Owned Subsidiary (“WOS”) has been substituted to include an entity outside India, including International Financial Services Centre (“IFSC”). Under this, a clear demarcation over the liability of the person resident in India has been made, ensuring that the same does not exceed beyond the interest or contribution in the funds. Strategic sector: This includes energy and natural resources, where it has been made clear that it shall not be mandatory for entities with core activity in any strategic sector to restrict the limited liability structure of a foreign entity. Thus, ODI can be made in such a structure in unincorporated entities as well. Overseas Portfolio Investments: The definition of OPIs has been expanded to include the nature of investments which would be categorized as an OPI. However, the following shall not be included: (i) any unlisted debt instruments; or (ii) any security which is issued by a person resident in Indian who is not in an IFSC; or (iii) any derivatives unless permitted by RBI; or (iv) any commodities including Bullion Depository Receipts (“BDRs”). Further, sponsorship contribution issued by an investment overseas, duly regulated for the financial sector in the host jurisdiction, shall be treated as OPI. Additionally, listed Indian companies and resident individuals can make such investments in places other than IFSCs. In IFSCs, even unlisted Indian entities can make these investments in units or any other instruments issued by an investment fund or vehicle. | |
| 2. | Change in Permission for making overseas investments | The Master Direction specifies that the investor must submit Form FC[1] and relevant documentation to their AD Banks for approval, reducing ambiguity in the permission process. Further the direction has made clear guidelines for the AD Banks to adhere to, which include (i) background and details of the transactions; (ii) reasons for seeking approval in light of FEMA provision; (iii) observations including viability of the foreign entity, or (iv) benefits which may be accrued to India, or any other such observations. |
| 3. | Approval from RBI | The Master Direction mandates documentation required for RBI approval including viability assessment and recommendations wherever the financial commitment exceeds USD 1 (one) billion (or its equivalent) in a financial year. |
| 4. | No Objection Certificate(“NOC”) from the lender bank/ regulatory body/ investigative agency | Under the previous OI Rules and Regulations thereunder, NOC was required to be issued against a person resident having an account as a Non-performing Asset (“NPA”) and is under investigation by financial sector regulators, before making financial commitment or undertaking disinvestment. The Master Direction mandates that where an Indian entity has already issued a guarantee in accordance with FEMA before an investigation has been initiated or before an account has been classified as NPA/wilful defaulter and subsequently is required to honor such contractual obligation, such payment due to the invocation will not constitute as fresh financial commitment and a NOC will not be required. |
| 5. | ODI in startups | The present Master Direction provides for ODI in startups allowing Indian entities to invest in foreign startups, ensuring that the same is not made out of funds borrowed from others, and puts the obligation on the AD Banks to obtain necessary certificates from the statutory auditors/chartered accountant of the Indian entity. |
| 6. | Reporting and Delay in Reporting | The direction mandates that all the reporting with respect to overseas investment by a person resident in India shall be made through the AD Banks in lieu of previous directions[2], along with complying to the OI Regulations and reporting requirements under the Liberalised Remittance Scheme (“LRS”). Further, in case a person resident in India makes a delay in filing/ submitting the requisite returns, such person may have to pay late submission fee (“LSF”) through the designated AD Bank. |
| 7. | Restriction of Further Financial Commitment or Transfer | The Master Direction defined restrictions on additional financial commitments to clarify that any further financial commitments or transfers related to overseas investment shall only be facilitated by AD Banks if there is no delay in reporting. This in turn aids in preventing unregulated financial exposure. |
| 8. | Financial Commitment by an Indian Entity | Under the Master Direction, an Indian entity can make financial commitments abroad within the limits set by the OI Rules. These are made through ODIs, debt, or through non-fund based financial commitments. The key highlights are: The Parties to the Transaction shall comply with the FEMA provisions. With respect to guarantees, performance guarantees are valid for contract’s duration, and no RBI approval is needed for remitting funds for invoked guarantees. Invoked guarantees which are debts must be reported in Form FC, and Roll-over of guarantees doesn’t count as new financial commitments but must be reported. Group companies can extend guarantees, which will count towards their financial commitment limits. |
| 9. | Overseas investment by person resident in India, other than an indian entity or resident individual | Under the Master Direction, specific caps have been introduced on financial commitments, such as USD 7 billion for Mutual Funds (“MFs”) and USD 1 billion for Venture Capital Funds. Further, a limited number of qualified MFs are permitted to invest up to USD 1 billion, which is based on their operational history, their capacity to manage the funds etc. These shall be considered as OPI irrespective of whether the securities are listed or not. |
| 10. | Overseas Investments in an IFSC in India | The Master Direction provides that resident individuals are free to make ODI in IFSCs , unlike the foreign entities, except for entities engaged in banking or insurance. This allows for specific investment procedures and benefits for investments made in IFSCs. |
| 11. | Operational Instruction to AD Banks | The Master Direction provides detailed operational instruction to the AD Banks , ensuring that they facilitate and monitor overseas investments effectively. Herein, it provides penal action under Section 11 and 13 of the FEMA if the AD Banks facilitate remittance towards financial commitments without obtaining the requisite duly completed Form FC. Further, it is the onus of AD Banks to ensure that bonafides of the transaction comply with the Know-Your-Customer (“KYC”) Guidelines, FEMA provisions, anti-money laundering guidelines, among others. |
- CONCLUSION
The Master Direction represents a significant oversight over the regulatory framework governing overseas investments by Indian residents, ensuring that the same serves as a broader framework for the already existing OI Rules and Regulations, coupled with the circulars in place[3]. Through this Master Direction, efforts have been made to clearly define what to be categorized as overseas investments, and have attempted to explicitly mention the key roles and responsibilities to AD Banks and onus of responsibility. These changes ensure that the investors interest and the governance standards are in sync with each other, and a responsible financial practice over overseas investments could be adhered to.
Thereunder, some key changes (as highlighted below) were introduced to offer a better regulatory compliance framework, and ensure that the interests of the investors remain intact.
| Sl. No. | Introduction | Description |
| Change in definition | The definition under the Master Direction has been revised to provide for a more robust definition to include: Foreign entity: The extant concept of Joint venture (“JV”) and Wholly Owned Subsidiary (“WOS”) has been substituted to include an entity outside India, including International Financial Services Centre (“IFSC”). Under this, a clear demarcation over the liability of the person resident in India has been made, ensuring that the same does not exceed beyond the interest or contribution in the funds. Strategic sector: This includes energy and natural resources, where it has been made clear that it shall not be mandatory for entities with core activity in any strategic sector to restrict the limited liability structure of a foreign entity. Thus, ODI can be made in such a structure in unincorporated entities as well. Overseas Portfolio Investments: The definition of OPIs has been expanded to include the nature of investments which would be categorized as an OPI. However, the following shall not be included: (i) any unlisted debt instruments; or (ii) any security which is issued by a person resident in Indian who is not in an IFSC; or (iii) any derivatives unless permitted by RBI; or (iv) any commodities including Bullion Depository Receipts (“BDRs”). Further, sponsorship contribution issued by an investment overseas, duly regulated for the financial sector in the host jurisdiction, shall be treated as OPI. Additionally, listed Indian companies and resident individuals can make such investments in places other than IFSCs. In IFSCs, even unlisted Indian entities can make these investments in units or any other instruments issued by an investment fund or vehicle. | |
| 2. | Change in Permission for making overseas investments | The Master Direction specifies that the investor must submit Form FC[1] and relevant documentation to their AD Banks for approval, reducing ambiguity in the permission process. Further the direction has made clear guidelines for the AD Banks to adhere to, which include (i) background and details of the transactions; (ii) reasons for seeking approval in light of FEMA provision; (iii) observations including viability of the foreign entity, or (iv) benefits which may be accrued to India, or any other such observations. |
| 3. | Approval from RBI | The Master Direction mandates documentation required for RBI approval including viability assessment and recommendations wherever the financial commitment exceeds USD 1 (one) billion (or its equivalent) in a financial year. |
| 4. | No Objection Certificate(“NOC”) from the lender bank/ regulatory body/ investigative agency | Under the previous OI Rules and Regulations thereunder, NOC was required to be issued against a person resident having an account as a Non-performing Asset (“NPA”) and is under investigation by financial sector regulators, before making financial commitment or undertaking disinvestment. The Master Direction mandates that where an Indian entity has already issued a guarantee in accordance with FEMA before an investigation has been initiated or before an account has been classified as NPA/wilful defaulter and subsequently is required to honor such contractual obligation, such payment due to the invocation will not constitute as fresh financial commitment and a NOC will not be required. |
| 5. | ODI in startups | The present Master Direction provides for ODI in startups allowing Indian entities to invest in foreign startups, ensuring that the same is not made out of funds borrowed from others, and puts the obligation on the AD Banks to obtain necessary certificates from the statutory auditors/chartered accountant of the Indian entity. |
| 6. | Reporting and Delay in Reporting | The direction mandates that all the reporting with respect to overseas investment by a person resident in India shall be made through the AD Banks in lieu of previous directions[2], along with complying to the OI Regulations and reporting requirements under the Liberalised Remittance Scheme (“LRS”). Further, in case a person resident in India makes a delay in filing/ submitting the requisite returns, such person may have to pay late submission fee (“LSF”) through the designated AD Bank. |
| 7. | Restriction of Further Financial Commitment or Transfer | The Master Direction defined restrictions on additional financial commitments to clarify that any further financial commitments or transfers related to overseas investment shall only be facilitated by AD Banks if there is no delay in reporting. This in turn aids in preventing unregulated financial exposure. |
| 8. | Financial Commitment by an Indian Entity | Under the Master Direction, an Indian entity can make financial commitments abroad within the limits set by the OI Rules. These are made through ODIs, debt, or through non-fund based financial commitments. The key highlights are: The Parties to the Transaction shall comply with the FEMA provisions. With respect to guarantees, performance guarantees are valid for contract’s duration, and no RBI approval is needed for remitting funds for invoked guarantees. Invoked guarantees which are debts must be reported in Form FC, and Roll-over of guarantees doesn’t count as new financial commitments but must be reported. Group companies can extend guarantees, which will count towards their financial commitment limits. |
| 9. | Overseas investment by person resident in India, other than an indian entity or resident individual | Under the Master Direction, specific caps have been introduced on financial commitments, such as USD 7 billion for Mutual Funds (“MFs”) and USD 1 billion for Venture Capital Funds. Further, a limited number of qualified MFs are permitted to invest up to USD 1 billion, which is based on their operational history, their capacity to manage the funds etc. These shall be considered as OPI irrespective of whether the securities are listed or not. |
| 10. | Overseas Investments in an IFSC in India | The Master Direction provides that resident individuals are free to make ODI in IFSCs , unlike the foreign entities, except for entities engaged in banking or insurance. This allows for specific investment procedures and benefits for investments made in IFSCs. |
| 11. | Operational Instruction to AD Banks | The Master Direction provides detailed operational instruction to the AD Banks , ensuring that they facilitate and monitor overseas investments effectively. Herein, it provides penal action under Section 11 and 13 of the FEMA if the AD Banks facilitate remittance towards financial commitments without obtaining the requisite duly completed Form FC. Further, it is the onus of AD Banks to ensure that bonafides of the transaction comply with the Know-Your-Customer (“KYC”) Guidelines, FEMA provisions, anti-money laundering guidelines, among others. |
- CONCLUSION
The Master Direction represents a significant oversight over the regulatory framework governing overseas investments by Indian residents, ensuring that the same serves as a broader framework for the already existing OI Rules and Regulations, coupled with the circulars in place[3]. Through this Master Direction, efforts have been made to clearly define what to be categorized as overseas investments, and have attempted to explicitly mention the key roles and responsibilities to AD Banks and onus of responsibility. These changes ensure that the investors interest and the governance standards are in sync with each other, and a responsible financial practice over overseas investments could be adhered to.
[1] Reserve Bank of India, “Master Direction-Reporting under Foreign Exchange Management Act, 1999”, June 20, 2024. Available at: Reserve Bank of India – Master Directions (rbi.org.in)
[2] Foreign Exchange Management Act, 1999 (42 of 1999)
[3] Refer to Foreign Exchange Management( Overseas Investment) Direction, 2022. Available at:Reserve Bank of India – Master Directions (rbi.org.in) & Foreign Exchange Management( Overseas Investment) Direction, 2022- Investment in Overseas Funds. Available at: Reserve Bank of India – Notifications (rbi.org.in)
[4] Foreign Exchange Management(Overseas Investment) Regulation, 2022. Available at: Reserve Bank of India – Notifications (rbi.org.in)
[5] Foreign Exchange Management(Overseas Investment) Regulation, 2022. Available at: Reserve Bank of India – Notifications (rbi.org.in)
[6] Reserve Bank of India, “Master Direction-Reporting under Foreign Exchange Management Act, 1999”, June 20, 2024. Available at: Reserve Bank of India – Master Directions (rbi.org.in)
[7] Ibid
[8] Refer to Foreign Exchange Management( Overseas Investment) Direction, 2022. Available at:Reserve Bank of India – Master Directions (rbi.org.in) & Foreign Exchange Management( Overseas Investment) Direction, 2022- Investment in Overseas Funds. Available at: Reserve Bank of India – Notifications (rbi.org.in)
