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India’s Investment Horizon Expands: RBI’s Latest Amendments to Foreign Exchange Management (Overseas Investments) Directions, 2022


The FEM (OI) Directions were issued by the Reserve Bank of India (RBI) on August 22, 2022[1] to provide detailed operational instructions for the new overseas investment regime under the Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022. The FEM (OI) Directions supersede the previous Master Directions on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) abroad.


The Directions specify the automatic and approval routes for making overseas investments, the reporting requirements, and the forms to be used. Adherence to these guidelines is mandatory for Indian investors. The FEM (OI) Directions provide specific provisions related to investment in overseas investment funds by Indian entities and individuals. This is an important aspect as investment in foreign funds was not explicitly permitted earlier.


Reserve Bank of India (RBI) has significantly expanded the scope of Overseas Portfolio Investments (OPIs) for Indian investors and companies by notified amendment in Paragraph 1(ix)(e) and Paragraph 24(1) of Foreign Exchange Management (Overseas Investment) Directions, 2022[2]. Under the amended Foreign Exchange Management (Overseas Investment) Directions, 2022, Indian entities like listed companies as well as individuals can now invest in a wider range of overseas investment funds, including those structured as corporations, limited liability companies, or partnerships, rather than just funds issuing "units".


This change provides much-needed flexibility for Indian investors looking to participate in offshore funds. Previously, the regulations had restricted OPIs to only those funds that issued formal "units". Units mean beneficial interest of the investors in the Investment Fund maybe fully or partly paid up.


The RBI has now clarified that OPIs can be made into "units or any other instrument (by whatever name called)" issued by overseas investment funds, as long as the fund is duly regulated in its home jurisdiction. This re-opens the doors for Indian investors, including both listed companies and unlisted entities, to invest in a broader range of offshore funds.


Importantly, the amendments also allow unlisted Indian companies to invest in funds set up in India's International Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City). This is expected to boost fundraising and investment activity in GIFT City's growing fund management ecosystem.


Overall, these changes provide much more flexibility for Indian investors to participate in the global investment landscape, without being constrained by the previous restrictions on fund structures. The RBI's move is seen as an important step in further liberalizing India's overseas investment regime.[3]


The recent changes to India's Overseas Portfolio Investment (OPI) regulations have the potential to significantly impact the investment landscape. By expanding the investor base and including overseas investment funds as a permissible asset class, Indian entities and individuals now have greater opportunities to diversify their portfolios and participate in global investment opportunities. This move aligns the Indian regulatory framework with international practices, where fund-level regulation is more common than entity-level regulation. Additionally, the carve-out for entities operating in India's International Financial Services Centre (IFSC) provides them with enhanced flexibility to leverage their unique position and participate in overseas investment fund opportunities, further strengthening India's appeal as an attractive IFSC destination. These liberalized OPI rules may also lead to an increase in capital flows from India to overseas investment funds, potentially enhancing cross-border investment and economic cooperation. 


Overall, the RBI’s amendment to the FEMA (Overseas Investment) Rules is a progressive step that is expected to provide greater flexibility and opportunities for Indian entities and individuals to diversify their investment portfolios and participate in the global investment landscape.


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