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  • Muhammed Ijaz

All is Well, Except 'Control': A Critical Review of ‘Revamped’ Overseas Investment Framework

[Muhammed is a student at Faculty of Law, University of Delhi.]

Given the evolving entrepreneurship surge in India and the increasingly integrated global business market, Indian entrepreneurs have been vocal about restructuring the existing outbound investment legal and regulatory framework. Upholding the need for liberalization, the Central Government and the Reserve Bank of India have recently undertaken a comprehensive exercise to revamp the existing regulatory framework of overseas investment and have formulated a revamped overseas investment framework (Revamped/New Framework) comprising the FEMA (Overseas Investment) Rules 2022 (OI Rules) notified by the Central Government and FEMA (Overseas Investment) Regulations 2022 (OI Regulation) notified by the Reserve Bank and the FEMA (Overseas Investment) Directions 2022 (OI Directions).

The framework regulating overseas investments from India was earlier governed by the FEMA (Transfer or Issue of any Foreign Security) Regulations 2004 and the FEMA (Acquisition and Transfer of Immovable Property outside India) Regulations 2015, which have now been subsumed by the OI Rules, OI Regulations and the OI Directions that supersedes 53 erstwhile directions or circulars issued to operate the previous outbound investment framework.

While the OI Rules propose to deal with the investment in non-debt instruments and acquisition and transfer of immovable property outside India and regulatory aspects of the framework including the conditions and permissions for making an overseas investment, restrictions from making Overseas Direct Investment (ODI), etc., the OI Regulations deal with investments by way of debt instruments, such as guarantee, pledge, charge, etc. and cover aspects such as the conditions for undertaking financial commitment, investment in debt instruments, consideration in case of acquisition or transfer of equity capital of a foreign entity, mode of payment, and reporting requirements. The OI Directions provide for guidance on the interpretation of the OI Rules and and the OI Regulations, and operational instructions to the AD banks. They also provide for certain compliance requirements from the erstwhile ODI master directions, not covered in the OI Rules or the OI Regulations.

Some of the significant changes brought about through the new rules and regulations are:

  1. Clarity with respect to various definitions such as ‘foreign entity’, ‘overseas portfolio investment’ (OPI), etc.;

  2. Introduction of the concept of 'strategic sector';

  3. Dispensation with the approval requirement for deferred payment of consideration;

  4. Permission in respect of ODI by Indian entities in non-financial sector, in startups and IFSC; and

  5. Introduction of the concept of 'late submission fee' for delayed reporting.

In view of the above significant changes, it would not be an understatement that the New Framework is an exercise of rational overhaul. However, a critical reading on the same Revamped Framework also points out certain ambiguities, including those pertaining to the definition of 'control', ‘layers’ and 'step down subsidiaries' (SDS) vis-a-vis 'round tripping' provision, which are discussed in detail below.


Unlike the previous framework, the New Framework introduced ‘control’ as a key term by specifically defining it under the OI Rules (Rule 2 (1)(c)) as a right which enables one to appoint majority of the directors or to control management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to 10% or more of the voting rights or in any other manner in the entity. Precisely, the term control has been defined as a ‘threshold’, upon the trigger of which necessary compliance as per the OI Rules and the OI Regulations is to be met with.

The concept of ‘control’ has already been prevalent through various existing Indian laws and regulations, namely, the Companies Act 2013 (Section 2(27)), the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Regulation 2(1)(e)), and the FDI policy of 2020 (definition 2.1.8).

Coming to the New Framework, in addition to the prevalent definition of 'control' incorporated in the statutes and the regulations discussed above, the definition as per the New Framework also includes the exercise of control by virtue of voting rights with a 10% threshold, meaning thereby that if a voting rights' agreement entitles 10% or more, it will still be ‘control’. The 10% threshold may have been introduced to demarcate a clear boundary between ODI and OPI in the New Framework.

One Framework - Multiple Interpretations

However, the ambiguity pertaining to the term ‘control’ incorporated in the New Framework arises when it is read with the note provided under Para 20 of the OI Directions which deals with restrictions and prohibition on layers of subsidiaries. The mentioned note provides that a foreign entity will be said to have control if it holds a stake of 10% or more in an entity. This implies that a mere stake of 10% or more in an entity will also be deemed as a ‘control’ which is certainly capable to subsume the 10% voting rights' threshold which has been provided in the OI Regulations.

A combined reading of the definition ‘control’ as set out in the regulations and the note provided in the OI Directions is not providing a clear picture, and the question whether 10% voting rights coupled with rights to appoint a majority of directors/take key policy decisions has to be considered or a minority stake of only 10% will trigger control, remains unanswered.

A significant implication of this ambiguous definition of control is that this would cause Indian entities to ascertain if there are investments by foreign entities that cause them to hold 10% or more of voting rights resulting in the establishment of control during the course of foreign outbound investment transactions. Also, as raised previously, if a mere 10% of stake holding other than the prescribed 10% voting rights threshold will still be construed as control, it will result in recurrent ascertainment of control in numerous investment transactions held by entities in their subsidiaries/SDS leading to a complex compliance and reporting burden.

‘Round Tripping’ - Unclear ‘Layers’

Round tripping is commonly construed as a combination of transactions involving the transfer of money across jurisdictions, eventually resulting in a return to the jurisdictions of origin. Typically, such transactions are not bona fide and are used for tax evasion or money laundering.

Until the Revamped Framework, there has been no conclusive provision which categorically dealt with provisions related to round tripping except in 2019 when RBI responded through an FAQ (later updated in the master directions) that the Indian party is not permitted to set up a step down subsidiary/joint venture in India through its foreign entity (wholly owned subsidiary /joint venture) directly or indirectly through step down subsidiary of the foreign entity.

Advancing beyond mere insertion in the FAQs, the New Framework effectively dealt with the provision relating to round tripping under the OI Rules [Rule 17(3)] which provide that an Indian entity can invest in a foreign company having/ (intending to) establish a subsidiary in India subject to:

(a) the overall structure not resulting in more than 2 layers of subsidiaries; and

(b) the foreign entity being engaged in a bona fide business activity.

Although the new framework has relaxed the restrictions pertaining to round tripping by allowing investment in entities up to 2 layers of subsidies/SDS, it is still not entirely clear whether the ‘two layers of subsidiaries’ need to be considered from the perspective of Indian party or the foreign entity (more precisely, if this prohibition on multi-layered structures is intended to cover only investments which result in round tripping into India or even those multi-layered structures which are entirely outside India).

Further, the identification of subsidiaries is quintessential in establishing round tripping, the question of the threshold for determining subsidiaries is still unclear within the new framework. As per Section 2(87) of the Companies Act 2013, the threshold is provided as 50% for determining a subsidiary, whereas for that of a foreign entity, a mere 10% stake would suffice as per the New Framework.


Despite the fact that the Revamped Framework offers simplification and clarity in terms of concepts and provisions as that of the erstwhile framework , the ambiguities pertaining to ‘control’ and clarity upon ‘layers’ of subsidiaries with respect to restrictions on structure of investment needs to be resolved for the following reasons:

  1. As per the new framework, once control is established, the entity over which the foreign entity exercises the control will be regarded as a subsidiary of the foreign entity or an SDS. Resultantly, the structure of the subsidiary/ SDS will be required to comply with the structural requirements of a foreign entity as provided in the framework.

  2. Additionally, the revamped framework, which prescribes detailed reporting requirements applicable to the Indian entity acquiring control through the foreign entity, has ambiguities in relation to establishing control and layers of Indian entities which would result in recurring and humongous reporting and compliance burden.

In view of the above discussions, it can be concluded that the revised regulatory framework is undoubtedly a rational move and certainly capable of easing doing of overseas businesses for Indian entities, but the above-cited ambiguities must be resolved with immediate intervention from RBI by way of an amendment or clarity note. Else, the ambiguities are capable enough to derail the key objectives of this new regime by being an “Achilles heel” inflicting relentless confusion and complex legal compliances for Indian corporations engaged or aspiring for outbound investments and business.


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