ODI primarily refers to a situation in which an Indian party is willing to acquire stake or some other form of a financial commitment, partially or wholly, in an overseas company. The entrepreneurs of India have proved that they are no less smart than any of their global peers. More & more CEOs in the recent past have been scouting for acquisition opportunities or for setting up subsidiaries abroad so that they can front their international business via a foreign base.
If you are advising your client on ODI or you are yourself the end investor, following points should be kept in mind as far as Foreign Exchange Management Act (FEMA) is concerned:
i. Partnership firms & Trusts need to take prior approval before making an ODI. This is unlike for Companies which are permitted to make ODI under the automatic route subject to a cap.
ii. Investment value under ODI cannot exceed 400% (this figure was reduced to 300% for a while but has been restored back) of net worth as on the last audited balance sheet of the Indian Company.
iii. Investment value need not refer merely to equity purchase; it also includes other forms of financial participation (loans is a classic example)
iv. Please note that ODI can be done by resident “individuals” as well. The only difference is that such overseas investments would be under the LRS route.
v. The limit permissible under LRS is US$ 250,000 per person per financial year (the limit given here is as on the date of publication of this article; please check the limits again because there is a change literally every 12 to 18 months).
vi. If investment is successfully made but the operations haven’t commenced in the overseas entity within 6 months of such investment, then a separate report needs to be filed. In my opinion, most companies forget to do this unless they are served a notice by RBI. Better late than never; in case you have missed out, then you can always file an application for condonation of delay and attempt to rectify your mistake for good.
vii. Apart from reporting mentioned in vi. above, an annual performance report (APR) needs to be filed after the end of each financial year
viii. Indian company can advance loans to overseas entity only if there is equity participation. To put it on other words, an Indian company can’t merely grant a loan to any foreign company without owning some equity in it. In other words, under the automatic route, equity participation must precede the event of lending.
Additionally, as a chartered accountant, we also need to consider the income tax issues. The ones highlighted above are in relation to provisions approve RBI & FEMA; so to take this one step further, following should be noted as far as the provisions of Income Tax Act are concerned:
– Firstly & most importantly, no income tax is required to be paid on the income earned by the foreign entity from your foreign investments. For instance, as an individual, you have acquired a 50% stake in a US company. The said company has earned a profit of $500,000 for a given financial year. That per se doesn’t mean you have to pay tax on your share of the profit. Income tax obligation arises in your case only when the said profit has been distributed in form of dividends, royalties, etc.
– In the past 3 years, Indian government has made many changes to ITR format as far as reporting of foreign assets and income is concerned. There is a separate scheduled wherein detailed information in relation to assessee’s foreign income and assets is being fetched. Do not skip out to let your tax consultant know about your foreign investment to fill-in such details. The good thing is there is no tax liability but things can miserably go wrong if you fail to report.’
– DTAA between India and the respective country should be considered. In almost every case, I have found that treaties have been extremely helpful for ethical planning.
– Changes in shareholding structure of management of overseas entity needs to be reported to RBI. Please note such reporting is only in nature of intimation and not for the purposes of obtaining approval as such.
As it can be seen from above, there are a plethora of rules & regulations, and checks and balances which RBI has kept in place; however that said, in my opinion it is admirable that RBI has ensured a hassle free ODI policy for willing and genuine investors.
Author is associated with R. K. Doshi & Co., Chartered Accountants and may be contacted at firstname.lastname@example.org