Restructuring foreign entity under ODI rules

[g srikanth]

Rule 18 of the ODI Rules, 2022 states that ' A person resident in India who has made ODI in a foreign entity may permit restructuring of the balance sheet by such foreign entity, which has been incurring losses for the previous two years as evidenced by its last audited balance sheets, subject to...'. What is restructuring is not defined; however assuming capital reduction is restructuring, my doubt is whether such a capital reduction is permitted even when the foreign entity does not incur losses in the last 2 years? What happens when the Indian entity does not have 'control'? If a capital reduction happens even without losses, can the Indian entity prevent the reduction? Any thoughts will be appreciated.

[YAGAY andSUN]

Restructuring foreign entity under ODI rules.

Based on the text of Rule 18 of the ODI (Overseas Direct Investment) Rules, 2022, it appears that the restructuring of a foreign entity’s balance sheet is permissible under certain conditions, notably when the foreign entity has incurred losses for the previous two years, as evidenced by its audited balance sheets.

Regarding your questions:

1. Can capital reduction happen even without losses?

• The Rule 18 specifically mentions that restructuring, including balance sheet restructuring (potentially capital reduction), is permissible if the foreign entity has been incurring losses for the last two years, as evidenced by audited financial statements. If the foreign entity has not incurred losses in the past two years, the rule, as written, does not clearly permit restructuring under the same provisions. Thus, capital reduction in the absence of losses (based on Rule 18) may not be explicitly permitted under these guidelines.

2. What happens if the Indian entity does not have ‘control’?

• The rule applies to a “person resident in India” (typically the Indian entity or investor) making an ODI in a foreign entity. Control is a crucial aspect of determining the nature of the relationship between the Indian entity and the foreign entity.
• If the Indian entity does not have control over the foreign entity, the rule may not apply in the same way because control is often linked to the ability to influence major decisions, such as restructuring. However, the exact specifics of what constitutes "control" in this context might depend on other provisions of the ODI guidelines and FDI policy.

3. Can the Indian entity prevent a capital reduction if there are no losses?

• If capital reduction were to happen without losses, the Indian entity's ability to prevent such an action would depend on the level of control it has in the foreign entity and any relevant agreements between the parties (e.g., shareholder agreements).
• However, if the Indian entity does not have control and is merely an investor, it might not have the ability to directly prevent a capital reduction unless specific provisions or rights are outlined in its investment agreements or shareholder rights.

Summary:

• Capital reduction is explicitly linked to circumstances of losses in the foreign entity in Rule 18 of the ODI Rules, 2022. If no losses have occurred, the rule does not provide a clear allowance for restructuring or capital reduction.
• If the Indian entity does not have control over the foreign entity, the ability to influence or prevent capital reduction would depend on the specifics of its ownership and shareholder rights. If it has no control or significant influence, its ability to block such actions would likely be limited.

For a more detailed and specific answer, you may want to consult a legal expert specializing in international investments or the relevant financial regulations to clarify the nuances of "control" and potential exemptions or interpretations of Rule 18.

AI Summary

Rule 18 ODI Rules 2022: Foreign Entity Balance Sheet Restructuring Permitted After Two Years of Losses. Rule 18 of the ODI Rules, 2022 allows restructuring of a foreign entity's balance sheet if it has incurred losses for the past two years, as shown in audited financial statements. Capital reduction without such losses may not be permitted under these rules. If the Indian entity lacks control over the foreign entity, its ability to influence decisions like capital reduction is limited. The capacity to prevent capital reduction depends on control and any specific agreements. For precise guidance on control and restructuring under Rule 18, consulting a legal expert in international investments is advisable.