The finance ministry is also evaluating how to interpret foreign direct investment and overseas portfolio investments.
According to persons familiar with the strategy, the government is considering tightening overseas investment regulations imposed last year in an effort to reduce capital roundtripping.
When an investment made overseas is routed back to the country of origin, this is known as roundtripping. While roundtripping can be done for legitimate economic purposes, it can also be done to evade taxes and launder money, which is why the government is concerned.
According to the sources, one idea being examined is to strengthen the FEMA (Overseas Investment) Rules, 2022, which were established in October.
The government is particularly concerned with clause 19 (3) of these laws, which states that an Indian resident may engage in an offshore corporation or its step-down Indian subsidiary if the planned investment structure is confined to two layers of subsidiaries. Such investments are permitted in the absence of express authorization from the Reserve Bank of India.
The administration now seeks to repeal the provision that allows for a two-tiered investment structure. In fact, the proposed amendment would permit such investments only if no intermediary layer/subsidiary exists between the foreign corporation and the Indian entity receiving the foreign investment.
According to the sources, the finance ministry is also evaluating possibilities on how overseas direct investment (ODI) and overseas portfolio investments (OPI) are treated.
ODI is now defined as investments of 10% or more of the paid-up equity capital in a listed foreign firm or acquisition of control of a listed foreign corporation, among other things. OPI refers to any investment that is not ODI.
Outward foreign direct investments in India fell to $974 million in June 2023, down from $1.9 billion the previous year.
According to another individual familiar with the situation, the plan is “at the discussion stage.” “The Prime Minister’s Office supports tightening the conditions as well.” The RBI’s viewpoint is equally essential. As a result, a final decision will be made after considering all factors.”
