Investing abroad rules revamped to increase ease

Source: The post is based on the article “Investing abroad rules revamped to increase ease” published in The Business Standard on 24^th August 2022.

Syllabus: GS 3 – Economy.

News: The Union government recently, strengthened overseas investment rules for Indian entities to impart greater clarity and improve the ease of doing business.

Why overseas investment rule is needed?

India doesn’t have full convertibility on the capital account.

It is important for the government and the RBI to monitor overseas transactions by Indian entities because of their wider implications for currency management and financial stability.

The policy establishment has made it easier for Indian entities to acquire businesses and other assets abroad.

The rule is aimed at bringing clarity to enable Indian businesses to integrate with the global value chain.

What are the new rules?

The new rules clearly differentiate between direct and portfolio investment and put in place clear guidelines.

Indian Entity: An Indian entity can make overseas direct investment (ODI) by taking an equity stake in a genuine business through various possible means like bidding, tendering etc. The arrangement should be in accordance with the law applicable in India or the host country.

Indian Entity engaged in financial services: The entities engaged in financial services in India can make ODI directly or indirectly, in a foreign entity, engaged in financial services.

Indian Entity not engaged in financial services: An Indian entity not engaged in financial services can also make an ODI in a foreign entity engaged in financial services, except in banking and insurance.

Prescribed Limit: The commitment by an Indian entity in all foreign entities put together should not exceed 400 per cent of its net worth. In the case of overseas portfolio investment (OPI), it should not exceed 50 per cent of net worth.

Individuals: Individuals can make an ODI or OPI but the limit would be subject to the liberalized remittance scheme of the RBI.

An individual can acquire foreign securities without any limits by way of inheritance from a person resident in India.

However, the rules prohibit Indians from investing in foreign entities engaged in real estate activity, gambling, or dealing with products linked to the Indian rupee without the RBI’s permission.