Overseas Portfolio Investment Goes Beyond Units: Analysis of the RBI’s Amendment

The authors are Tanisha Chivate and Shivesh Didwania, fourth-year students at Maharashtra National Law University, Mumbai.

On June 7 2024, the Reserve Bank of India (“RBI”), notified amendments (“Amendment”) to the Foreign Exchange Management (Overseas Investment) Directions 2022 (“OI Directions”). This move seeks to streamline Indian law with the diverse investment fund structures abroad and promote and enhance opportunities for overseas investments by Indian investors. This article aims to detail the RBI Amendment and elucidate its ramifications. The article expounds how this move can contribute in providing better and safe access to previously restricted jurisdictions for investment by allowing investors to invest in instruments other than ‘units’.  The article concludes by highlighting what the implications of the Amendment are for Indian investors and the cross-border investment landscape alongside the larger implications of the Amendment, presenting the road ahead for a better overseas investment framework.

Key Features of the Amendment

Previously, as per paragraph 1(ix)(e) of the OI Directions, an investment made by entities in the ‘units’ of any overseas investment fund, that is duly regulated by a financial sector regulator of the foreign country, shall be considered as an Overseas Portfolio Investment (“OPI”). The Amendment seeks to broaden the scope of OPI to include investments made in other instruments as well, which are issued by the overseas investment fund, thus not limiting the scope of OPI to only ‘units’. This is permitted overseas and in International Financial Services Centres (“IFSC”). The explanation further also includes overseas investment funds duly regulated by a financial sector regulator of the country by way of a fund manager.

Effect of the Amendment — Greater Clarity for Overseas Investment

The move seeks to provide better clarity on the law for overseas investment and to align India's position on overseas investment to the laws pertaining to other jurisdictions. It will open more gates for OPI and will provide more options to the Indian entity or a resident individual, in the sense that it will not be limited to invest in only ‘units’ but can also invest in shares, bonds or partnership/membership interests in these overseas investment funds and in any other instrument. The Amendment is silent on the nature of the instruments in which investments can be made. Hence, it is safe to assume that both equity and debt instruments can be resorted to for investments, which provide for better flexibility and tax efficiency. This is a step in the right direction since many offshore funds are set up as corporate bodies issuing shares rather than trusts issuing units. It reopens avenues for investments in limited liability partnerships, body corporates and especially variable capital companies (VCCs) which are swiftly becoming a preferred choice for offshore investment due to tax incentives and unique flexible structure.

Furthermore, the amendment would drastically increase opportunities to invest in jurisdictions like Singapore and the state of Delaware in the U.S.A, in which the regulation is carried on the investment fund by way of a fund manager. The funds located in these jurisdictions boast of their global fund management expertise and stability. Previously, these investment funds were considered as funds which lie outside the scope of ‘overseas investment fund’ under Paragraph 1(ix)(e) of the OI Directions. They were thus considered outside the scope of permissible OPI. By broadening the scope of an overseas investment fund, the RBI has also tried to handle the problem of unlawful and indirect manners in which investments were made in these barred overseas investments funds.

Funds can be set up in these new jurisdictions to encourage investments from India under the amended OPI norms. This change in regulation would provide the freedom to investment funds to establish their funds in commercially favourable jurisdictions without the worry of permissibility of Indian investments along with a chance to garner the Indian capital. Previously, due to the restrictions, funds were set up in jurisdictions such as the Cayman Islands, Mauritius etc. so that the Indian Limited Partners (LPs) could make investments in units of these funds. However, now the OPI norms have been relaxed to allow access by these Indian LPs to new jurisdictions.

Chiefly, the amendment restricts investment in offshore funds that are regulated, either directly by the regulator or by way of a fund manager. There existed some ambiguity in the erstwhile OI Directions as to whether the funds are to be regulated directly or only through the fund manager, which is now clarified in the Amendment. Additionally, laws regulating funds vary across jurisdictions — some jurisdictions like India require the fund to be registered with the concerned regulator whereas certain jurisdictions mandate the fund manager to be accordingly licensed or registered with regulators. Thus, the Amendment resolves this legal conundrum. RBI has ensured that the requirement for regulatory oversight is not compromised and simultaneously by way of allowing indirect regulatory oversight, it has further liberalised the market.

Lastly, it is important to note that the Amendment retains the distinction between an individual resident in India and an unlisted Indian entity. The investment avenues for both of these are different and have not been changed in the Amendment. The OPI continues to allow only a limited investment opportunity to the unlisted Indian companies.  According to Paragraph 1(ix)(e), listed Indian companies and resident individuals may make OPI in jurisdictions other than IFSCs too. However, an unlisted Indian entity may also make such OPI in IFSC. In our opinion, the differentiation plays a very important role in keeping a check on unlisted entities. However, one may argue that this limitation on investment avenues for unlisted entities may be relaxed in the future for a more liberal OPI framework.

Conclusion: The Road Ahead?

The Amendment aims to encourage OPI by providing more options to the Indian entities and individuals who wish to invest by way of OPI without any ambiguity. It increases the level of access for Indian investors in the international investment market. It has not only opened the doors for investment in the stable and established markets situated in previously restricted jurisdictions but also paved the way to investment in emerging markets. The Gujarat International Finance Tec-City (“GIFT City”) is spearheading the new chapter of overseas investment in India. By setting up their GIFT City branches, the entities are utilising the opportunity of accessing the new international market of India, in the form of GIFT IFSC along with benefits such as tax benefits, statutory relaxations etc. GIFT City is still the only overseas jurisdiction in which unlisted Indian entities can make OPI in investment funds as per Schedule V of the OI Directions. With constant changes for the improvement of the ease of doing business and to overhaul the investment market, it will be very interesting to see the future changes with respect to overseas and foreign investment. The Amendment will help streamline the Indian regulatory framework with the international investment market. The Indian market is definitely opening up by way of changes such as this Amendment and direct listing norms.