Benefits and challenges of global investments for Indian investors

By Rohit Dhawan

Portfolio diversification, the practice of spreading your investments to optimize returns and reduce risks, has evolved significantly over time. Traditionally, investors mainly diversified within their own countries or regions due to their familiarity with local economics and limited access to foreign opportunities.

However, the internet’s expansion and regulatory changes have made global investments highly accessible. Here we will explore the benefits and challenges of global investments for Indian investors and discuss the key highlights of the regulatory framework they must follow.

Advantages of Global Investments

Geographical Diversification: Investing globally reduces your exposure to a single market, distributing your risk. Different regions have distinct performance patterns that help mitigate market volatility and potentially improve your risk-adjusted returns.

Diversifying Currency Exposure: The Indian rupee often depreciates against developed nations’ currencies. Investing in foreign assets can act as a hedge against rupee devaluation and global market fluctuations.

Exploring New Opportunities: International investments provide access to opportunities that might not be available in the domestic market. For example, Indian investors can explore specialized sectors like semiconductor manufacturing or cloud data centers in Western markets.

Challenges of Global Investments

Political and Economic Stability: Political instability, government changes, and economic volatility in foreign countries can impact investments. Assessing the stability of the investment environment is crucial.

Regulatory and Legal Complexities: Navigating foreign market rules, regulations, and legal systems can be challenging and costly.

Cultural and Language Differences: Differences in culture and language can lead to communication barriers, misunderstandings, and difficulties in building relationships with local partners.

Lack of Local Knowledge: Insufficient understanding of the local market, including consumer behavior, market dynamics, and competition, can lead to poor investment decisions.

Regulatory Framework for Indian Investors

As of August 22, 2022, the Reserve Bank of India (RBI) introduced new directives to simplify foreign investments, including shares and properties, for Indian investors. This framework comprises rules from the Central Government (Overseas Investment Rules 2022), RBI regulations (OI Regulations 2022), and RBI directions (OI Directions 2022).

Indian investors can invest overseas either through Overseas Portfolio Investment (OPI) or Overseas Direct Investment (ODI) route. However, under OPI, these investments must not exceed $250,000 per financial year (with few exceptions), which covers capital and current account transactions under the Liberalized Remittance Scheme (LRS). Capital account transactions involve equity and debt investments, while current account transactions cover expenses like medical costs, private visits, gifting, and donations. There is no such limit while making investment via ODI route.

ODI

ODI includes the acquisition of unlisted foreign entity equity, subscribing to a foreign entity’s memorandum, and investing in more than 10% of the equity capital of a listed foreign entity. Investments below 10%, but with control (holding more than 10% voting power), also fall under ODI. Indian residents cannot invest in foreign entities involved in real estate, gambling, or Indian rupee-linked financial products.

Investments in startups recognized by the host country’s laws must be funded from the investor’s own resources and comply with both Indian and host country laws. Regulatory requirements include submitting Form “Financial Commitments” (FC) to the Authorized Dealer Bank (AD Bank) and an “Annual Performance Report” (APR) each year.

OPI

OPI encompasses investment in foreign securities that do not qualify as ODI and excludes unlisted debt instruments. Investments under OPI can fall within the LRS limit of $250,000 per year or exceed this limit.

Investments accounted within the LRS limit comprise of less than 10% stake in listed equities, sweat equity shares, minimum qualification shares, ESOPs (listed/unlisted), international mutual funds, listed bonds, and Investment in entities located in “International Financial Services Centre” (IFSC), Gujarat International Finance Tech (GIFT) City in Gujarat.

Investments coming outside the purview of LRS limit include the acquisition of foreign securities by way of inheritance or gift.
Conditions for OPI investments include that

a) the investor must not have control over the foreign entity in which the investment is being made;

b) Investing is permissible only in foreign entities engaged in non-financial services activities;

c) Resident individuals cannot transfer overseas investments as gifts to people residing outside India. Reporting obligations have been eased, with no APR requirement, but specific bank documents are needed for remittance.

Under the Income Tax Act, investment details in foreign stocks/assets must be disclosed in the Income Tax Return’s Schedule of Foreign Assets. Non-disclosure may incur penalties. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, imposes a stringent penalty for non-disclosure and a tax collected at source on remittances over INR 7 lakh.

Conclusion

The new overseas investment framework offers more opportunities for Indian investors to explore foreign markets. It includes various investment types, brings greater transparency, and streamlines regulatory processes. This transformation contributes to improving the ease of doing business and empowers a broader range of investors, making global investments increasingly accessible and understandable.

(Author is Senior Manager – Investment Research and Advisory, Aranca)