Here are some key changes that retail investors who wish to invest outside India or acquire real estate outside India should be aware of.
new definition of foreign direct investment ,ODI) And foreign portfolio investment ,OPI,
Foreign Portfolio Investment (OPI) and Foreign Direct Investment (ODI) are two different types of investment avenues that Indian investors use to make foreign investments. Under the old rules/instructions, there was no clear distinction between OPI and ODI. Further, OPI was not defined and under ODI, there was no specific mention of percentage of equity holding proposed to be purchased to qualify as ODI/OPI. Retail investors faced difficulty in determining whether their investments in foreign entities constituted ODI compliance or ODIs requiring OPI.
How new definitions help retail investors
resulting in clearer definitions of ODI and OPI under the new foreign investment The rules, for resident retail investors making foreign investments, have the following changes:
- Equity investment by resident individual/entities in an unlisted foreign company, even if such investment is less than 10%, with or without control, shall be treated as ODI. As an ODI investment, an individual has to adhere to ODI compliance. These include submission of newly introduced Form FC and annual filing of Annual Performance Report (APR) in Form APR.
- Form FC is required to be submitted to the Authorized Dealer Bank (AD Bank) before investing. It contains details of the investor, foreign entity, investment details etc. Form APR has to be submitted to the AD bank on or before 31st December annually which contains the financial details of the foreign entity.
- Investments above or below 10% stake in a listed foreign company by resident individual/entities with control will also now be treated as ODI. Hence, a person has to submit the same documents as mentioned above.
- With the introduction of new foreign investment rules, retail investors can no longer subscribe to unlisted government debt securities/bonds under the ODI and OPI rules. It is now specifically provided that any investment made by a resident investor in entities located in IFSC (Gift City in Gujarat) shall be in accordance with the ODI/OPI rules/regulations. Indian retail investors will be able to invest in foreign shares under the Liberalized Remittance Scheme (LRS) limit through an international exchange set up in IFSC.
gift of foreign securities
The old rules allowed only a resident individual to receive foreign securities by way of gift from a non-resident, Person of Indian Origin (PIO) or Overseas Cardholder Indian (OCI). However, there were no explicit provisions relating to gifting of foreign securities between two resident individuals.
The new foreign investment rules now specifically provide that an Indian resident may, by way of gift, acquire foreign securities from another Indian resident, who is a relative and holds such securities in accordance with the provisions of FEMA.
Under the new foreign investment rules, a resident Indian cannot receive gifts of foreign investment from friends or any other relative of resident Indian who are not defined under the Companies Act. The Companies Act has a narrower definition of the word ‘relative’ than the Income Tax Act. For example, the brother of a spouse is included as a specified relative under the Income Tax Act, but not under the Companies Act.
Gifts (including foreign securities) given by one person to another shall be exempt under the Indian Income Tax Act, 1961 if received from a specified relative.
Direct investment in immovable property outside India by a person resident in India
The new framework now allows an Indian resident to acquire such assets under the provisions of FEMA from the proceeds of or sale of assets other than ODI acquired abroad. This means that a resident Indian can use the sale proceeds of immovable property outside India, income from such property (rent etc.), sale proceeds of investments made under OPI or income earned thereon, etc. to acquire new immovable property outside India. can to do. This was not allowed under the old rules.
The old real estate rules restricted an Indian resident to jointly own immovable property with an NRI relative. Joint holding with a NRI relative was allowed only if no remittance was made from India by the resident Indian. However, the new foreign investment rules have removed this restriction. Thus, the resident can now remit money up to the LRS limit (USD 2.5 lakh) to acquire immovable property jointly with an NRI relative. The relative should be the same as defined under the Companies Act.
Penalty for non-compliance of new rules
It should be noted that there is no change in the time limit for completion of compliance under the new foreign investment rules. RBI has also introduced compliance requirements for OPI investments which were not required earlier.
Delay in compliance with old ODI regulations: As per the old rules, Indian investors had to go through the compounding process with the RBI and pay the penalty imposed by the RBI for regularizing delay in reporting compliance or pursuing appellate measures.
Under the new foreign investment rules, an option has been given to regularize the delay of up to 3 years in filing Form ODI/Form FC/APR, FLA return, Form OPI, Proof of Investment or any other return by paying late submission . Fee (LSF) which is a nominal fee as under:
This will now avoid the long drawn out and costly compounding process / litigation process for such reporting omissions and is a welcome move.
Under the new foreign investment rules, an Indian resident is not required to file an annual performance report if the foreign entity holds less than 10% equity capital, has no control over the entity and the investor has financial commitments other than There is no mode of equity capital in such foreign entity. This will result in reducing the compliance cost of initial reporting of investments in the form of ODI/Form FC as well as annual reporting in APR.