Overseas investments by residents face policy gaps

By Vikrant Kumar, Vasudev Dibbur and Bissheesh Roy, L&L Partners
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Investments by resident individuals in shares of foreign entities fall within the framework of either the Master Direction on Liberalised Remittance Scheme (LRS scheme) or the Master Direction on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad (ODI regulations), depending on the nature of the specific investment.

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Vikrant Kumar
Partner
Luthra & Luthra

Based on past experiences with the implementation of these two regulations by authorized dealer banks (AD banks), it appears that the Reserve Bank of India’s (RBI) policy is to regulate portfolio investments under the LRS scheme, while investments which do not qualify as portfolio investments (because, for example, they exceed a particular size and/or provide the investor management or control rights over the foreign entity) are regulated under the ODI regulations. In theory, there is nothing wrong with this policy. However, the RBI should consider formally clarifying this policy intent.

The LRS scheme permits resident individuals to freely remit outside India amounts up to US$250,000 in a financial year for certain capital account transactions permitted under the LRS scheme. For investments abroad, the capital account transactions permitted under the LRS Scheme are: (a) acquisitions of shares of listed and unlisted overseas entities or debt instruments; (b) acquisitions of qualification shares as a director of an overseas entity; (c) acquisitions of shares in consideration for professional services to the overseas entity or in lieu of director’s remuneration; and (d) investment in units of mutual funds, venture capital funds, unrated debt securities and promissory notes. The LRS scheme requires a resident who wishes to make remittances for any of these purposes to provide a prescribed declaration for the purchase of foreign currency. Usually, AD banks require the individual to provide a signed declaration for the AD banks to confirm that the proposed investment is a portfolio investment.

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Vikrant Kumar and Vasudev Dibbur are partners and Bissheesh Roy is an associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.

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L&L Partners

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