Indians can now invest in foreign firms. The new rules, explained

The Indian government and the RBI have released newly-certified laws and regulations on overseas investments called ''Foreign Exchange Management (Overseas Investment) Rules'' and ''The Foreign Exchange Management (Overseas Investment) Regulations, 2022''. The laws impose heavy restrictions on defaulters and encourage domestic corporate entities to invest abroad.

What is the new rule about and how will it affect us? To stop prospective Indians who are following the footsteps of Nirav Modi and Vijay Mallya in the hope of using public money for their own personal needs, the government has notified big updates in the overseas investment rules to ensure that bank defaulters cannot send and hide our money abroad. Meanwhile, the government's rules seem to encourage corporates to invest outside India. The overseas investment rules bring deeper clarity on topics like the process of making overseas direct investments and overseas portfolio investments by Indian entities and Indian resident individuals. 

First, what's NOT allowed? 

1. If you are an Indian resident and want to invest in foreign companies that are engaged in three specific businesses, you need specific approval from the Reserve Bank of India (RBI). This includes companies that are in the business of : 

• Real estate activity
• Gambling
• Dealing in financial products linked to the Indian rupee.

2. Also, if you are an Indian resident and:

• You have been labeled as a 'willful defaulter' by a bank
• Or you are under investigation by the Central Bureau of Investigation (CBI), Enforcement Directorate (ED) or Serious Frauds Investigation Office (SFIO),

then you will have to obtain a no-objection certificate (NOC) from your bank and the investigative agency before making any overseas “financial commitments” or disinvesting any overseas assets. The bank or the investigating agency needs to submit a NOC in 60 days and if they don't, the resident can go ahead with the same. 

Now, what's allowed? 11 points:

1. You can receive foreign securities/stocks as a gift from any non-resident outside India. (Earlier you could receive such foreign stocks only from relatives).
2. There is a clear distinction now between ODI and OPI. Overseas Direct Investments (ODIs) are all investments in unlisted foreign entities and more than 10% in listed foreign entities and Overseas Portfolio Investments (OPIs) are investments by listed companies in foreign listed securities.  
3. If you are a resident in India and have acquired equity capital in a foreign entity or have directly invested overseas, you will have to submit an Annual Performance Report (APR) for each foreign entity, every year by December 31. But if you have held less than 10% shares in foreign companies, do not have control in these companies and that's all the foreign investment you have in your name, then you don't need to submit an APR. 
4. An Indian entity can make an Overseas Portfolio Investment of not more than 50% of its net worth as of its last balance sheet date. Indian employees can receive ESOPs from foreign parent companies. 
5. The government has introduced a new concept of 'strategic sectors' like energy and natural resources, where the government can allow investments over and above the limits in the rules.  
6. Earlier, non-financial Indian companies could not invest in financial service firms like brokerages, asset management funds, and credit cards companies. Now, that restriction has been lifted, thus enabling thousands of non-financial companies to invest in financial service firms abroad. But they still cannot invest in banks and insurance firms. An entity not in financial services can also invest in a foreign company registered with the International Financial Services Centres (IFSC) authority.
7. If you are a resident in India and say you invested in the equity capital of a foreign entity to the extent of 10% or more. Here, it will be classified as ODI (Overseas Direct Investment). Now if you sell some of your investments and your holding falls below the 10% mark, your investment will continue to be treated as ODI. Also, if you have invested in equity shares of such a foreign entity, you can enjoy the benefits of a rights issue and bonus issue.
8. RBI can set a ceiling limit to control cash outflow in a financial year and to invest beyond that financial limit, you will have to take prior permission from RBI. 
9. Indian residents can sell equity shares to another Indian resident in India or outside India if the purchaser is eligible to make such investments. 
10. An Indian entity that has an overseas office can acquire immovable property outside India for the business and residential purposes of its staff.
11. If you are an Indian resident, then you can acquire land/ building/ property outside India from a person resident outside the country in multiple ways. You can inherit property, or purchase it by paying foreign exchange held in an RFC account or make a purchase from the remittances sent under the Liberalised Remittance Scheme instituted by RBI. You can also buy it jointly with a relative or from the income or sale proceeds of your assets.