Amendments to the Foreign Exchange Management (Overseas Investment) Directions, 2022: Enhanced scope of Overseas Portfolio Investments

INTRODUCTION

The Reserve Bank of India (“RBI”) in exercise of powers conferred under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (“FEMA”) has issued amendments to the Foreign Exchange Management (Overseas Investment) Directions, 2022 – Investment in Overseas Funds vide A.P. (DIR Series) Circular No. 09 dated June 07, 2024[i] (“Amendment Directions”) to expand the scope of what may be categorised as an Overseas Portfolio Investment (“OPI”) under the Foreign Exchange Management (Overseas Investment) Directions, 2022 – Investment in Overseas Funds dated August 22, 2022 (“FEM (OI) Directions, 2022”).[ii]

The following are the key highlights of the Amendment Directions:

1.  Definition of OPI

Paragraph 1(ix)(e) of the FEM (OI) Directions, 2022 provides for investments which may be categorised as OPI. Prior to the Amendment Directions, the FEM (OI) Directions, 2022 provided that investment including sponsor contribution in units of any investment funds overseas, duly regulated by the regulator for the financial sector in the host jurisdiction, shall be fall within the meaning of OPI.

However, pursuant to the introduction of the Amendment Directions, the definition of OPI has been expanded to also include the investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund overseas and duly regulated by the regulator for the financial sector in host jurisdiction. The Amendment Directions further provides that in jurisdictions other than International Financial Services Centre (“IFSC”), only listed Indian companies and resident individuals shall be entitled to make such investment whereas, in IFSCs, an unlisted Indian entity shall also be entitled to make such OPI in units or any other instrument (by whatever name called) issued by an investment fund or vehicle in accordance with Schedule V of the FEMA (Overseas Investment) Rules, 2022[iii].

The Amendment Directions also inserts an explanation to the meaning of ‘investment fund overseas, duly regulated’, to include funds whose activities are regulated by financial sector regulator of host country or jurisdiction through a fund manager.

2.  Overseas Investment in an IFSC in India by a person resident in India

Prior to the Amendment Directions, Paragraph 24(1) of the FEM (OI) Directions, 2022 provided that a person resident in India, being an Indian entity or a resident individual is entitled to make investment including sponsor contribution in the units of an investment fund or vehicle set up in an IFSC as OPI.

However, pursuant to the introduction of the Amendment Regulations, a person resident in India (whether an entity or resident individual) may make investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund or vehicle set up in an IFSC, as OPI. Further, unlisted Indian entities may also make such investment in IFSCs, as per the Amendment Directions.

CONCLUSION

The Amendment Regulations provides flexibility to the investors and companies based in India to invest in overseas funds without any restrictions. Previously, a person resident in India were only permitted to invest in units issued by overseas funds. However, with the amendments, the investment is now allowed in any instrument, regardless of its form and whether it is in units.

[i] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12691&Mode=0.

[ii] https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12381.

[iii] Schedule V, FEMA (Overseas Investment) Rules, 2022; https://rbidocs.rbi.org.in/rdocs/content/pdfs/GazetteRules23082022.pdf.