Jurisdiction of the RBI in overseas investment

Overseas investments by Indian entities are governed by the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, read with the Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad, issued by the Reserve Bank of India (RBI) on 1 July 2011. The regulations and the master circular were issued in exercise of powers granted to the RBI under the Foreign Exchange Management Act, 1999 (FEMA).

While overseas investments by Indian entities are viewed as important avenues for promoting global businesses of Indian entrepreneurs, it is not always certain if an effective legal regime exists to enable Indian entrepreneurs to structure, restructure and disinvest their overseas ventures in a commercially efficient manner.

Automatic route

Indian parties are permitted to invest in an overseas venture (either a JV or WOS) under the automatic route subject to compliance with certain conditions stipulated in the regulations and the master circular. Further, while the regulations do not expressly permit a special purpose vehicle (SPV) established abroad by an Indian party to set up overseas ventures, the master circular and FAQs issued by the RBI expressly permit this, subject to complying with the overall investment caps and guidelines.

Commercially, overseas SPVs play an important role in structuring and establishing the operating overseas ventures for Indian parties. The government of India and the RBI have recently expressed reservations over multi-layered structures in overseas investments, on the basis that they are not expressly permitted in the regulations. A new policy on overseas investment is proposed soon specifically detailing “multi-layered structures”.

In light of the express provisions surrounding SPVs in the master circular and the FAQs, some Indian parties have structured their overseas investments through SPVs. The recent views of the government and RBI create uncertainties for existing structures and raise issues regarding enforceability of the FAQs and the master circular.

Modes of disinvestment

Similarly, while the regulations and the master circular permit transfer of shares of the overseas entity by way of sale by the Indian party to another Indian party (subject to conditions), they do not address any other mode of disinvestment (such as mergers, buybacks or liquidation of the overseas entity in compliance with the host country’s regulations). However, the RBI’s FAQs permit disinvestment by an Indian party from its overseas venture “by way of transfer/sale of equity shares to a non-resident/resident or by way of liquidation/merger/amalgamation of the JV/WOS abroad”.

The regulations and the master circular themselves offer no clarity on whether disinvestments by alternative means are permitted and if the conditions for sale of shares of the overseas entity would have to be complied with for such disinvestments.

In order to give a purposive interpretation it can be argued that disinvestment through the modes mentioned in the FAQs are permitted. Alternatively, one could argue that as other modes of disinvestment are not mentioned under the regulations and the master circular, prior approval of the RBI would be required, particularly because the RBI is now challenging “multi-layered structures”, which were otherwise permitted under the FAQs.

Minority shareholders

The question of disinvestment by alternative modes could become more complex where the Indian party is a minority shareholder of an overseas JV. If the overseas entity, with approval of its majority shareholders and in compliance with the laws of its host country, undertakes a restructuring involving transfer of shares of an Indian minority shareholder, then while the overseas JV would be outside the scope of the FEMA (and the RBI could not regulate the restructuring per se), participation by the minority Indian shareholder in the restructuring would be contingent on prior RBI approval.

Thus, in effect a legally compliant overseas restructuring could come within the purview of RBI merely due to the presence of minority Indian shareholders. This would result in complex issues arising from the interplay of rights granted to minority shareholders in the host country and the regulation of such minority shareholders by the RBI.

Conclusion

The discussion relating to the establishment of SPVs and modes of disinvestment of overseas entities raises questions regarding enforceability of the FAQs which have been issued by the RBI itself. Given the large number of overseas investments by Indian parties, a move by the RBI to clarify and provide guidance on the issues mentioned above would be welcome.

Anuj Prasad is a partner and Anubhuti Agarwal is a principal associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.