Forex rule tweaks to allow Indians to invest in foreign fintech companies
Several technology entrepreneurs and angel investors have faced challenges in acquiring stakes in foreign fintech companies because until now only non-banking companies (NBFCs) registered with the Reserve Bank of India (RBI) have been allowed to invest in foreign companies involved in financial services.
Technology entrepreneurs and angel investors were largely ineligible for NBFC licence, market participants said. Financial services in India are also subject to high compliance requirements and hence even the qualified were not interested in becoming an NBFC, they said.
According to the amended rules, the only caveat for making such investments is to have been profitable for the last three years. Even those criteria need not be met if the investment is routed through the International Financial Services Center (IFSC), Gift City.
“Allowing Indian entities not engaged in financial services but with three years of net profit to invest in foreign entities involved in financial services is a good move, especially for new entrants in the space,” said Tejesh Chitlangi, senior partner at IC Universal Legal. “Removal of even a three-year net profit requirement for making such ODI (overseas direct investment) in IFSC-based entities will strengthen the IFSC regime,” he added.
The new rules also ease the compliance burden for family businesses with exposure to foreign securities that wish to undertake restructuring. In such a restructuring, shares owned by one family member are typically transferred in whole or in part to another member. Now the government has allowed such restructuring under automatic approval route, which means they do not need permission from RBI.
“General permission for gifting between relatives who are Indian residents will certainly facilitate transfers between families, which were otherwise subject to prior approval,” said Moin Ladha, partner at law firm Khaitan & Co. “However, the general permission is specific to gifts between resident Indian relatives and an approval will still be required if the donor is not a relative,” he added.
The government also created a new portfolio route where such investors will now be able to buy less than a 10% stake in foreign companies without having to run a joint venture. Until now, there has been only one investment route – foreign direct investment (ODI), and this route was primarily meant for those domestic entities that wanted to form a wholly owned subsidiary (WOS) or joint venture (JV) overseas. In such entities, the Indian investor will exercise some degree of control.
