Category: Banking & Finance

The Reserve Bank of India (RBI) is batting for easier overseas investment norms for Indian tech entrepreneurs and angel investors, said people with direct knowledge of the matter. As per the current rules, if an Indian resident buys shares in an unlisted company abroad, the foreign company cannot create any more step-down subsidiaries. This has proved to be a hindrance for Indian entrepreneurs looking to invest in foreign startups since it restricts the scalability of such companies.
Now, the RBI has learnt to have given a recommendation to the finance ministry, saying if such step-down subsidiaries are being opened as part of genuine and ‘bona fide’ expansion plans of a company, the restriction should not be applied.

Consultations with Industry
Emails sent to the RBI and the finance ministry remained unanswered until press time.
“Indian tech entrepreneurs are constantly looking for acquisition opportunities especially in the other developing countries; however, current rules make it very difficult to make such investments,” said a person cited above. “These investments have potential to bring dollar money back into India if the business venture succeeds.”

The RBI has held extensive consultations with the industry and the recommendations are based on inputs so received, said people cited above. Overseas investments by Indian residents fall under the ambit of the Liberalised Remittance Scheme. “A natural outcome of growth is expansion and hence it is extremely important that the step-down subsidiaries restriction be reconsidered,” said Moin Ladha, partner, Khaitan & Co. “This will enable Indian investors to get the advantages associated with such diversification.”

Indian owns less than 10% equity in the company. Portfolio investments enjoy liberal rules since they are meant for investment purposes only.

Currently, if an Indian buys shares of an unlisted foreign company, the company is presumed to be a joint venture. For instance, say an Indian ‘A’ buys a few shares of ByteDance – the parent of TikTok and an unlisted startup. Indian regulators presume that ByteDance is a JV where ‘A’ exerts some sort of control. Accordingly, ‘A’ is required to meet the steep compliance norms under the RBI rules.

In contrast, if ‘A’ had invested in shares of a foreign listed company, say Microsoft, it would have been considered a portfolio investment and would have been exempt from the compliance norms.

“It is impractical for a minority shareholder to be able to procure information or influence decisions of an overseas entity where they hold investment,” said a person with direct knowledge of the matter. “However, the current regime treat seven a minority investment as setting up or acquiring a joint venture abroad.”

The industry is also learnt to have requested the RBI to reconsider several more regulations. Most important of them all was a request to increase the cap on the LRS route. Currently under LRS, an Indian can remit a maximum of $250,000per financial year. The industry suggested the same to be hiked to at least $350,000. However, the RBI has so far not actedon the input, people cited above said.

Until a few years ago, outward remittance rules used to be the policy domain of RBI under the Foreign Exchange and Management Act (Fema). In other words, RBI could tweak the rules on its own. However, in 2019 the Centre replaced the rules is in the hands of the finance ministry. The RBI has been assigned the role of administering the implementation of NDI rules.