The Union finance ministry on August 23 said that an Indian corporate entity can make a direct investment under an automatic route into a foreign entity involved in financial services activity (except banking and insurance) beyond the prescribed limit in strategic sectors like energy and natural resources after obtaining necessary permissions.
- It means, Indian companies not in financial services can now directly invest in financial-services firms abroad, such as brokerages, asset management funds, and credit cards under the automatic route. Banks and insurance firms have been kept out of this.
- Earlier, such investment was prohibited. These new guidelines are aimed at easing rules for domestic firms that want to invest abroad.
Key highlights
- The move could open the door for many companies that want to do so. A company can now invest four times its profit if it has been profitable for three years.
- An entity not in insurance can invest overseas in general and health insurance if such a business supports the core activity of the Indian outfit.
- The same relaxation has been given for investment in GIFT City, where an entity not in financial services can invest in a foreign outfit registered with the International Financial Services Centres Authority.
- The regime has defined “control”. Holding less than 10 per cent in an overseas entity is, inter alia, not considered “control” but has been put under portfolio investment and permitted.
- Earlier, there was no threshold for investment in the unlisted space. The rules also exempt entities from the mandatory reporting requirement except in the case of equity capital in a foreign unlisted company.
- The reporting requirement had earlier led to compliance challenges, particularly because financial investors did not have the right to seek information from the target firm overseas.
- In the case of equity capital, the foreign entity’s annual performance report, certified by a statutory auditor, has to be submitted every year by December 31.
- Additionally, overseas direct investment has been given more flexibility by expanding the scope of the automatic route.
- Issuing corporate guarantees to or on behalf of a second or the next level step-down subsidiary (SDS) of an Indian entity does not require the Reserve Bank of India’s approval. It is now under the automatic route.
