The ‘overseas direct investment’ (ODI) route was used to transfer large amounts which could not have been remitted under other foreign exchange regulations.
“Overseas investment is permitted for bona fide business purposes abroad. Further, there are additional conditions such as continuing the investment for at least one year prior to disinvestment. Cognizance of such matters has been taken recently and a closer review is being done in case of unusual erosion in value,” said Moin Ladha, partner at the law firm Khaitan & Co.
Since a company can remit up to four times its net worth as ODI, the amount that company promoters can shift outside could be considerably more than the yearly limit of $250,000 a resident individual can invest abroad in securities and properties under RBI’s liberalised remittance scheme (LRS).
RBI is doing whatever it can to verify whether all overseas subsidiaries or joint ventures are engaged in bona fide businesses-more so, as many have used this vehicle in the past to do things that are not permitted directly, said Rajesh P Shah, partner at Jayantilal Thakkar and Company, a CA firm specialising in foreign exchange regulations. “So, RBI is making companies go through all the checks, like various disclosures including mandatory audit of overseas subsidiaries,” said Shah.Exits trigger standard procedures such as submission of transfer-related documents, valuation confirmation from a local agency, the rationale for exit and a comparison between the original investment amount and the expected realisation amount.”The regulator’s suspicion is stoked when large write-downs are shown within just a few years of the investments. For ODI the Indian investor entity must have a track record and net worth, but there are instances where such entities are leveraged and the possibility of fund diversion cannot be ruled out,” said Mitil Chokshi, senior partner at the tax, advisory and forensic firm Chokshi & Chokshi.
Under the new overseas investment rules which came into force from August 2022, a write-off can be initiated by the company automatically.
The recent cases that have come under regulatory glare relate to ODI deals prior to 2022.
But professionals like Harshal Bhuta, whose firm PR Bhuta & Co is advising the write-off of an US subsidiary with the business proving to be unsustainable, think that any business suffering losses should not be suspected as sham investment. “There are checks in place at various stages to ensure that the investment made in an overseas entity is towards bona fide purposes. Indian entities have to submit valuation reports, investment evidence, annual performance reports and other documents to authorised dealer banks which have to satisfy themselves about the genuineness of the investment/disinvestment. Additionally, in any investment/disinvestment case requiring RBI approval, the bank has to submit its comments or recommendations to the RBI,” said Bhuta.
There are situations where an overseas investee entity must follow the closure process in the foreign country, entailing liquidation and a no-objection certificate from overseas authorities. This can be time-consuming-while the procedure is comparatively simpler in jurisdictions such as the US, UK, and UAE, a more detailed explanation is sought by countries like Belgium, Singapore, and South Africa. “Now, justifications for losses are accepted by the local jurisdiction, the same could be accepted by Indian authorities too,” felt Chokshi.
