Forex rule tweaks to let Indians invest in foreign fintech companies
Several technology entrepreneurs and angel investors have been facing challenges in acquiring stakes in foreign fintech companies because until now only non-banking financial companies (NBFCs) registered with the Reserve Bank of India (RBI) were allowed to invest in foreign companies involved in financial services.
Technology entrepreneurs and angel investors were mostly not eligible for NBFC licence, market participants said. Also, financial services entities in India are subject to high compliance requirements, hence even the eligible ones were not keen on becoming an NBFC, they said.
As per the amended rules, the only caveat for making such investment is having a profitability track record in the last three years. Even that criteria need not be met if the investment is routed through International Financial Services Centre (IFSC), Gift City.
“Permitting Indian entities not engaged in financial services activities but with a three year net profit track record to invest in overseas entities involved in financial services activities is a good move, particularly 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 bolster the IFSC regime,” he added.
The new rules also ease the compliance burden on family businesses with exposure to foreign securities that want to undertake restructuring. Typically, in such restructuring, shares owned by one family member are transferred partially or in full to another member. Now, the government has permitted such restructuring under automatic approval route, meaning they won’t need a permission from the RBI.
“General permission for gift between relatives who are Indian residents will certainly ease inter-family transfers, which was otherwise subject to prior approval,” said Moin Ladha, partner at law firm Khaitan & Co. “The general permission, however, is specific to gifts between resident Indian relatives and an approval would still be necessary if the donor is not a relative,” he added.
The government also created a new portfolio route through which such investors will now be able to buy less than 10% stake in foreign companies without having to float a joint venture. Until now, there was only one route of investment – overseas 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 amount of control.