Fresh Norms To Ease Foreign Direct Investment Restrictions By JVs And Wholly Owned Subsidiaries Of Indian Companies

The government is likely to ease restrictions on foreign direct investment (FDI) by joint ventures (JVs) or wholly-owned subsidiaries (WOS) of Indian companies without categorizing such investments as “suspect” involving “round tripping” of funds.

The existing legal framework under the Foreign Exchange Management Act (FEMA) does not permit FDI by an overseas joint ventures JV or wholly owned subsidiaries of an Indian company without prior approval of the Reserve Bank of India (RBI). Similarly, there are restrictions on Indian entities to undertake overseas direct investment (ODI) in a foreign entity which already has existing FDI investment structures in India.

These changes are expected to be made in existing Overseas Direct Investment (ODI) regulations to ease restrictions and put such investments (FDI and ODI) under the automatic route, without prior approval of the RBI.

The stringent norms adopted by the RBI to prevent “round tripping” of funds impacted abilities of certain Indian companies which have made ODI outside India to attract FDI in India even for their group entities, even for legitimate and bona fide business purposes.

A High Level Advisory Group (HLAG) chaired by economist Surjit Bhalla, on how to increase India's exports, in its report has also suggested sweeping change in FDI regulations with a way to attract funds that go into building businesses in the country.

The Department for Promotion of Industry and Internal Trade (DPIIT) is also studying the report for finalizing changes in the Press Note pertaining to FDI by joint ventures of wholly owned subsidiaries of Indian companies. According to official sources, though the changes would give free access to FDI by an Indian entity through its own joint ventures or wholly owned subsidiaries, it would need to be established that such flow of funds is only for bonafide business interests and such funds are invested as FDI in India through proper banking channels.

Accordingly, it is likely that investment by a foreign entity (in which ODI is being made) whose total value of existing FDI does not exceed 25% of its consolidated net worth not be considered as 'round tripping' or in violation of ODI regulations.

The HLAC in its report has also recommended exemption to overseas listed companies i.e. companies which are listed overseas in Financial Action Task Force (FATF) jurisdictions (with market capitalization of certain specified thresholds), should also be allowed to invest in India, irrespective of its shareholding being held by persons resident in India.