This note deals with capital outflows, that is, investment into foreign countries by Indians. ## Capital Outflows 1. The focus on capital outflows has understandably been far less given that India’s priority is to attract foreign capital to fund its savings gap. 2. There was basically one channel, that is Overseas Direct Investment , until August 2022, which introduced 'Overseas Portfolio Investment' in regulatory framework. ### Why should India allow capital outflows? 1. It has been almost entirely for direct investment. 2. The focus on capital outflows has understandably been far less given that India’s priority is to attract foreign capital to fund its savings gap. The policy perspective forged during the FERA days had many negative vibes. 3. Why should a capital deficit countries export capital? In a capital scarce economy like ours, it is perhaps logical that there should be close monitoring of out-bound investments. 4. Shouldn’t overseas investment be considered on the basis of the returns it generates? Perhaps a time has come to take relook at it. 1. Creation of overseas assets by resident Indians goes as a credit entry in the international investment position. Therefore, rather than looking at dividend earning, there is a need to look at value enhancement. 2. Acquisition of strategic and economic assets, eg., coalfields, oilfields, etc. is a long-term priority. 3. Overseas investment can perhaps be seen as export, not of capital but of entrepreneurship. 4. It can be seen as affording an opportunity to Indian residents to diversify their portfolio. 5. Overseas investment is also an important phenomenon associated with start-ups. Several start-ups, including individual entrepreneurs/promoters are sending some money out of India to set up that overseas holding company, which is able to raise funds easily because of the ease of raising capital in a foreign jurisdiction. They then invests in India through this holding company overseas, whereas the economic activity is located in India, generating employment, revenue and economic value. 5. RBI and GoI have beeb evaluating their misgivings about regulatory regime in this regard and taking necessary corrective action. ## Overseas Investments 1. This note is related to the capital account (outflows) 2. Prior to Aug 2022, although there was no explicit OPI-ODI classification 3. [Aug 22, 2022](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12380) - Operationalisation of a new Overseas Investment regime was announced. 4. ==[Box V.3](RBI_Annual%20Report_2023.pdf#page=150&selection=235,0,235,59) - Operationalisation of a New Overseas Investment (OI) Regime== in RBI's Annual Report 2023 5. **Overseas Direct Investment:** 1. Acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity, or 2. investment in 10% or more of the paid-up equity capital of a listed foreign entity, or 3. investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity. 6. Explanation: Once an investment in a foreign entity is classified as ODI, the investment shall continue to be treated as ODI even if such investment falls below 10% of the paid-up equity capital or the investor loses control in the foreign entity. 7. **Overseas Portfolio Investment:** ^661677 1. An investment, other than ODI, in foreign securities, but not in 1. unlisted debt instruments; or 2. any security which is issued by a person resident in India who is not in an IFSC; or 3. any derivatives unless otherwise permitted by Reserve Bank; or 4. any commodities including Bullion Depository Receipts (BDRs) 5. .any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC is known as ‘Overseas Portfolio Investment’ or (‘OPI’). 8. Resident individuals may make OPI within the overall limit for Liberalised Remittance Scheme (LRS) in terms of schedule III of the OI Rules 9. The case for overseas direct investment (ODI) rests on permitting Indian entrepreneurs to exploit avenues for profitable investment abroad. 10. With this in view, RBI has progressively liberalized the regulatory regime for ODI. 1. But bout of Rupee volatility forces govt. to take steps to moderate it. 11. Not much capital flows from ODI - But as in case of any investment, ODI must also yield returns over time. Notwithstanding not very satisfactory experience so far in respect of inflow of income from our investments abroad. 12. Despite this, India has an investor friendly regulatory regime continues in place. 1. Here the aim of govt. is to not dent globalization efforts of Indian investors but only that under extraordinary circumstances investments beyond a threshold, other than financing by ECBs, have been moved to the approval route. 13. **Limits:** 1. Domestic mutual funds are permitted to invest in foreign securities up to an aggregate limit of USD 7 billion. 2. In addition, a limited number of qualified mutual funds are also permitted to invest cumulatively up to USD 1 billion in overseas exchange traded funds (ETF). 14. **Benefit** - Having higher limits for investments in overseas markets for banks with adequate capital strength can also help in developing further the forward markets. 15. August 2022 - Operationalisation of a new Overseas Investment regime for Indian entities and individuals was announced. 1. ==[Box V.3](RBI_Annual%20Report_2023.pdf#page=150&selection=235,0,235,59) - Operationalisation of a New Overseas Investment (OI) Regime== in RBI's Annual Report 2023 ## Liberalised Remittance Scheme (LRS) 1. [Link to the note](Liberalised%20Remittance%20Scheme%20(LRS).md) ## Rules/Regulations/Master Directions These Rules and Regulations are amended from time to time to incorporate the changes in the regulatory framework and published through amendment notifications 1. Rules - ==FEM (Overseas Investment) Rules ([OI Rules](https://rbidocs.rbi.org.in/rdocs/content/pdfs/GazetteRules23082022.pdf)), 2022 (Aug 22, 2022).== 1. It is to be noted that Rules are notified by central govt. 2. FEM (Transfer or Issue of any Foreign Security) (Amendment) Regulations, [2004](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=2126&Mode=0) (dated July 7, 2004) as amended from time to time, *(withdrawn)* 1. FEM (Transfer or issue of any foreign security) Regulations, [2000](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=173) (May 3, 2000) (outside India) *(withdrawn)* 3. FEM (Acquisition and Transfer of Immovable Property Outside India) (by residents of India) Regulations, [2015](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10257) (dated Jan 21, 2016) *(withdrawn)* 1. FEM (Acquisition and transfer of immovable property outside India) Regulations, [2000](https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=161) (May 3, 2000) *(withdrawn)* 2. Regulations - FEM (Overseas Investment) Regulations ([OI Regulations](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12380&Mode=0)), 2022 1. They cover debt instruments 3. Supersession - Both FEM (OI Rules), 2022 and FEM (OI Regulations), 2022 replaced the FEM (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015. 4. Regulations - [Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10258&Mode=0) 5. Regulations - [Foreign Exchange Management (Foreign Currency Accounts by a resident in India) Regulations, 2015](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10444&Mode=0) 6. [Master Direction - Overseas Investment](https://rbi.org.in/scripts/NotificationUser.aspx?Id=12710) (July 24, 2024) 1. [FEM (Overseas Investment) Directions (OI Directions), 2022](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12381) (Aug 22, 2022) *(consolidated) into Master Direction - Overseas Investment (July 24, 2024)* 1. [Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad](RBI_Master%20Directions_20160101_Master%20Direction%20–%20Direct%20Investment%20by%20Residents%20in%20Joint%20Venture%20(JV)Wholly%20Owned%20Subsidiary%20(WOS)%20Abroad.pdf) (Jan 1, 2016) *(replaced on Aug 22, 2022)* by [FEM (Overseas Investment) Directions, 2022](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12381) (Aug 22, 2022) 7. Master Direction – [Acquisition or Transfer of Immovable Property under FEM Act, 1999](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10196 ) (Jan 1, 21016) 1. Only Part-1 of this Master Directions (as it covers directions on acquisition or transfer of Immovable Property outside India) *stands withdrawn*. 2. Part II of this Master Direction covers directions on acquisition or Transfer of Immovable Property in India. 8. Master Directions - Reporting instructions related to Overseas Investment are provided in Part VIII of [Master Direction no. 18 on 'Reporting under Foreign Exchange Management Act, 1999' dated January 01, 2016](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10202). 9. [Master Direction - Liberalised Remittance Scheme (LRS)](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10192) *(for permitted capital and current account transactions)* 10. Acquisition or transfer of immovable property by Indian residents outside India and Non-residents in India is regulated in terms of sub-sections 2.(a), (4) and (5) of section 6 of the Foreign Exchange Management Act, 1999 (FEMA) read with: 1. **Outside India** (by Indian residents) 1. Rule 21 of [Foreign Exchange Management (Overseas Investment) Rules, 2022 dated August 22, 2022](https://rbidocs.rbi.org.in/rdocs/content/pdfs/GazetteRules23082022.pdf) and 2. paragraph 25 of the [Foreign Exchange Management (Overseas Investment) Directions, 2022 dated August 22, 2022](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12381&Mode=0) and  3. Directions - Master Direction - Overseas Investment (July 24, 2024) 4. [FAQs](https://rbi.org.in/Scripts/FAQDisplay.aspx?Id=117) - Purchase of Immovable Property 2. **In India** (by non-residents) 1. Acquisition or Transfer of Immovable Property in India (by Non-residents in India) is governed by the [FEM (Non-debt Instruments) Rules, 2019, with effect from October 17, 2019](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0), It is to be noted that Rules are notified by central govt. The FEMA 1999 empowers the Central Government to prescribe, in consultation with the RBI, rules pertaining to capital account transactions, not involving debt instruments. So these rules do not cover debt instruments 1. FEM (Acquisition and Transfer of Immovable Property in India) Regulations, [2018](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11248) *(withdrawn)* 1. FEM (Acquisition and transfer of immovable property in India) Regulations, [2000](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=175) (May 3, 2000) *(withdrawn)* 2. Directions - Only Part II of this [Master Direction 12/ 2015-16 - Acquisition or Transfer of Immovable Property](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10196 ) (as it covers directions on acquisition or Transfer of Immovable Property in India (January 1, 2016) 10. Remittances (outward) - [Link to regulatory framework](Inward%20Remittances%20(Private%20Transfers).md#Act/Rules/Master%20Directions) ## Data Releases 1. Monthly 1. RBI Bulletin - Outward Remittances under the Liberalised Remittance Scheme (LRS) for Resident Individuals 2. Press Release by RBI - Overseas Direct Investment both under Automatic Route and the Approval Route (from [July 2011](RBI_Press%20Release_20110622_RBI%20to%20put%20the%20data%20on%20Overseas%20Direct%20Investment%20in%20the%20public%20domain.pdf) onwards) 2. Department of Economic Affairs - Monthly fact sheets on India’s Overseas Direct Investment, published by the Department of Economic Affairs, with detailed sector-wise and country-wise data # References ### [[Speeches & Media Interactions|Speeches]] 1. Shyamala Gopinath. Jan 19, 2007. Overseas Investments by Indian companies - Evolution of Policy and Trends. (Key note address by Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India at the International Conference on Indian cross-border presence/acquisitions, Mumbai, January 19, 2007)| 2. Khan, H. R. (2014, May 12). *Regulating Capital Account: Some Thoughts* \[Speech\]. 9th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI). Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=14902) 3. Kanungo, B.P. (2019, Apr 25, 2019). *India’s growing significance in global arena. Is it Sustainable? Are we ready for it?* Reserve Bank of India.FEDAI Annual Conference at Beijing. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1074) 4. Sankar, T. R (2021, Oct 14). *India’s Capital Account Management – An assessment* \[Speech\]. Fifth Foreign Exchange Dealers’ Association of India (FEDAI) Annual Day on October 14th, 2021. Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627)