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The focus of these consultations will be around a particular regulation of the Overseas Direct Investment (ODI) regime which says that if an Indian resident buys shares in an unlisted company abroad, the said foreign company cannot create any more subsidiaries abroad, people cited above said.
The development comes as the central bank has received several representations from former startup founders and angel investors to ease these norms. According to market participants, several lucrative foreign buying opportunities keep coming up for these investors and due to the RBI restrictions, the scalability of such companies has become an issue. An email sent to RBI remained unanswered.
“RBI has responded to our queries saying they will hold a consultation with the industry to understand the issue and also what the industry expects,” said a lawyer representing a large startup founder. “Indian entrepreneurs are losing out on good investment opportunities due to the rules because scalable companies need the freedom to set up and expand wherever there is a good market.”
The freedom to set up subsidiaries is more important in the tech startup space where scalability comes through global presence like in the case of Uber, Netflix or Amazon.
Legal experts say the rule applies to only cases where an Indian resident buys shares of unlisted companies. However, if the same is in a company listed abroad, such investment will be called a portfolio investment and does not fall under the ambit of this rule.
“The problem is with the money laundering aspects of the law since allowing such structures could lead to round-tripping or tax evasion,” said another person cited above. “We are not sure how much ground the RBI is willing to concede to accommodate the industry demands.”
Say there is an angel investor in India who wants to buy this Silicon Valley-based startup. He could do so without much difficulty through the Liberalised Remittance Scheme (LRS) route. Now say after two years, the Silicon Valley company has grown well and now wants to explore newer markets. For that, the company will have to set up a subsidiary. This is where the RBI rules come in and prohibits such a structure.
“A natural outcome of growth is expansion and this does necessitate presence in different jurisdictions,” said Moin Ladha, partner, Khaitan & Co. “Restriction on step-down subsidiaries does create difficulties and RBI should consider relaxing this restriction subject to conditions.”
The RBI has been going tough on overseas investments by Indian entites in the last few years.
Two years ago, about 10 technology companies including one of the biggest information technology companies in the country received RBI notices for alleged round-tripping of money through the ODI route. Essentially these companies had bought some foreign companies and they wanted the acquired company to open operations in India as well. This arrangement was red-flagged by RBI saying it amounts to ’roundtripping’. Some of these disputes are still ongoing.
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