News about new FEMA rules, 2022

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Government notifies new overseas investment rules

RBI (Reserve Bank of India) on 22nd August, 2022 had notified the new Foreign Exchange Management (Overseas Investment) Regulations, 2022. They shall come into force on the date of their publication in the Official Gazette. 

Important Highlights of the new FEMA rules, 2022 are as under-

  • An Indian entity can make direct investment in foreign start-ups only from internal accruals whether from a domestic entity or group or associate company in the country;
  • It says a resident individual can directly invest in a foreign start-up, recognized under the laws of the host country, only from own funds;
  • The new rules bar a resident individual from making financial commitment in a foreign entity that has invested or invests in India, resulting in a structure with over two layers of subsidies;
  • Investment in foreign entities will be allowed only for banking and insurance firms, NBFCs and government firms;
  • The embargo on acquiring gift of foreign securities, only from relatives, has been substituted as permissible from any non-resident outside India, subject to compliance under Foreign Contribution (Regulation) Act, 2010;
  • An Indian entity is allowed to lend or invest in any debt instruments issued by a foreign entity
  • However, the above investment this will be subject to the condition that such loans are duly backed by a loan agreement where the rate of interest shall be charged on an arm’s length basis

(An arm’s length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. Arm’s length transactions assert that both parties act in their own self-interest and are not subject to pressure from the other party);

  • A person resident in India, through its designated AD bank, shall obtain a Unique Identification Number or “UIN” from the Reserve Bank for the foreign entity in which the ODI is intended to be made before sending outward remittance or acquisition of equity capital in a foreign entity, whichever is earlier
  • A person resident in India other than a resident individual making any Overseas Portfolio Investment (OPI) or transferring such OPI by way of sale shall report such investment or transfer of investment within sixty days from the end of the half-year in which such investment or transfer is made as of September or March-end
  • As per the government, the revised regulatory framework for overseas investment provides for simplification of the existing framework.

What does this new FEMA rules bring in for us?

The final set of rules introduces a host of changes that could impact M&A decisions of Indian residents, including corporates and start-ups. These new FEMA (Overseas Investment) Rules, 2022 – also for the first time have a set of norms for investments in the International Financial Services Centre (IFSC).

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