ARTICLE
19 January 2025

Impact Of RBI's 2024 Amendment On Overseas Portfolio Investment For Investors

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AK & Partners

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AK & Partners is a full-service law firm, whose expertise spans diverse practice areas, including Banking and Finance, Dispute Resolution, Transaction Advisory and Funds, Data Privacy, Tax, and regulatory compliance. Our services are offered across different legal forums and jurisdictions, including the USA, the UK, Singapore, Italy, Spain, Sri Lanka, etc.
On June 7, 2024, the Reserve Bank of India ("RBI") amended the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("OI Directions").
India Finance and Banking

Introduction

On June 7, 2024, the Reserve Bank of India ("RBI") amended the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("OI Directions"). This Amendment aligns Indian laws with global standards and broadens the scope of Overseas Portfolio Investment ("OPI") for Indian investors. This article examines its implications, focusing on flexibility, regulatory clarity, and strategic opportunities for diversified portfolios abroad.

Defining OPI and Recent Changes

Under the OI Directions, OPI was earlier restricted to 'units' of overseas funds regulated by foreign financial authorities. The June 7 Amendment revised Paragraph 1(ix)(e), expanding OPI to include investments in "any other instrument (by whatever name called)," such as shares, bonds, and partnership interests. This revision also permits investments through International Financial Services Centres ("IFSC"), increasing offshore market accessibility.

The Amendment defines a "regulated overseas investment fund" to include funds managed by entities regulated in their jurisdictions, such as Singapore and Delaware, aligning with global norms where managers are often the regulated entities rather than the funds themselves.

Regulatory Framework and Legal Implications

  1. Enhanced Investment Flexibility

Prior to the Amendment, OPI was constrained by the requirement to invest solely in units of funds directly regulated by foreign authorities. The revised framework eliminates this restriction, enabling Indian investors to leverage instruments like equity and debt securities, facilitating tax-efficient structures.

  1. Clarity on Fund Regulation

Funds regulated via fund managers are now permissible under OPI norms, harmonising with international practices.

  1. Liberalisation of Fund Jurisdictions

By allowing investments in funds established in jurisdictions regulated through fund managers, the Amendment encourages investments in jurisdictions like Singapore and Delaware. These jurisdictions offer tax benefits, commercial flexibility, and robust legal structures, including Limited Liability Partnerships (LLPs) and Variable Capital Companies (VCCs).

  1. Access for Unlisted Indian Entities

Listed companies and individuals may invest globally, while unlisted entities are limited to IFSCs under Paragraph 24(1) of the OI Directions. This distinction preserves oversight while opening international access for smaller entities.

Compliance and Operational Considerations

  1. Taxation Impact:

Investments in instruments other than units require assessment under the Income Tax Act, 1961. Capital gains may be taxed under Sections 9(1)(i) and 48 of the Income Tax Act, 1961, depending on valuation and holding patterns.

  1. Reporting Obligations

Investors must adhere to disclosure requirements under the Foreign Exchange Management Act, 1999 ("FEMA") and OI Rules, covering valuations, ownership structures, and regulatory approvals.

  1. Regulatory Scrutiny

The expanded definition of OPI may prompt increased scrutiny to prevent misuse of liberalised norms, especially concerning indirect investments in restricted jurisdictions. Entities must maintain robust documentation to demonstrate compliance.

Conclusion

The RBI's Amendment to the OI Directions liberalizes overseas investment frameworks, enabling broader access to international markets. While aligning with global standards, it requires compliance with tax and reporting obligations under FEMA and related rules.

As India continues to integrate with global financial markets, the Amendment paves the way for broader participation in international investment opportunities. Investors, particularly those leveraging IFSC platforms such as Gujarat International Finance Tec-City (GIFT City), are poised to benefit from expanded options and regulatory clarity. Moving forward, further reforms may be anticipated to sustain this momentum and support India's evolving financial landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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