RBI relaxes ban for those looking to buy stake of foreign firms in India

Indian companies cannot set up their subsidiaries through their foreign wholly-owned subsidiaries or joint ventures

The Reserve Bank of India (RBI) has clarified that there would be no “blanket ban” on Indian companies wanting to buy stakes in overseas firms, which already have investments in India under the automatic route. An approval from the apex bank would be required, though. 

According to the RBI’s frequently asked questions (FAQs) on overseas direct investment (ODI) updated in May, no Indian company, partnership firm or LLP can acquire a stake in an offshore company that has investments in an Indian entity. Also, Indian companies cannot set up their subsidiaries through their foreign wholly-owned subsidiaries (WoS) or joint ventures (JVs). 

The prohibition would apply even when the Indian company had a minuscule stake in the overseas company and could impact IT companies, start-ups with a control overseas, and Indian parties (IPs) which have set up JVs abroad.  “IPs can approach the Reserve Bank for prior approval through their authorised dealer banks which will be considered on a case to case basis, depending on the merits of the case,” the RBI noted in its clarification, inserted in its FAQs a few days back.

Moin Ladha, partner, Khaitan & Co, said: “The clarification in the FAQ is a welcome move. But given the uncertainty over the timeline involved, a carve-out for bonafide business transactions should be considered. Conditions can be prescribed to address the RBI’s concerns in relation to such transactions.” 

According to Dev Raj Singh, executive director, tax & regulatory services, EY India, the RBI may consider several factors before greenlighting the proposals. This could include assessing whether a structure is formed solely to get tax advantage or whether the Indian leg of the structure is simply one of the many investments that the foreign entity has formed across the globe and is part of its global operations. Or if the funds for the FDI leg have been raised overseas or the Indian funds are coming back as an FDI. “The rationale for why the investments could not be undertaken directly from India could be looked at,” he said. 

The RBI’s clarification does not completely address deal certainty issues, believes Iqbal Khan, senior partner, Shardul Amarchand Mangaldas & Co. “A better way forward would be to have a bright-line test for a transaction to be deemed bonafide. This could include assessing factors, such as profitability, prior history of non-compliances, and other such overseas bonafide investments,” he said.

Vinita Nair, partner, Vinod Kothari & Co, said: “The current RBI regulations permit investments by the JV/WOS in India in the form of share swaps. The RBI’s circular of December 29, 2014, prohibits investing of funds back in India only in case of loans/funds raised by the JV/WOS from domestic or overseas lender, and not generally. If the RBI intends to proscribe round tripping of funds, amendments in the current FEMA ODI regulations are required to be made instead of insertion in the FAQ.” 

ODIs include investments done outside India by an Indian by way of subscription to the memorandum of a foreign entity or purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchanges, signifying a long-term interest in the foreign entity.