Meaning

Overseas Direct investment means investments outside India, either under the Automatic Route or the Approval Route:

-by way of contribution to the capital or

-subscription to the Memorandum of a foreign entity or

-by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange

Automatic Route and Approval Route

Overseas Direct Investment can be made in foreign entity either under Automatic Route or Approval route. Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad. While under approval route, Indian Party require to approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments.

Investment in JV and WOS

Overseas Direct Investment can be made in Joint Venture (JV) or Wholly Owned Subsidiary (WOS).  “Joint Venture (JV)”/ “Wholly Owned Subsidiary (WOS)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party/Resident Indian makes a direct investment;

If Indian Party/Resident Individual holding 100% shares in a foreign entity then it is treated as Wholly Owned Subsidiary and if Indian/Resident Individual holds less than 100% then it is treated as Joint Venture.

Indian Party

Indian Party includes

  • Indian Company
  • Registered Partnership Firm
  • Registered LLP

Provided that : Where more than one such entities make an investment in foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.

Applicable Regulations for Making ODI by Indian Party/Resident Individual

  • The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 (FEMA 120/RB-2004)
  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2013 (FEMA.263/RB-2013)
  • Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad (FED Master Direction No. 15/2015-16 dated January 1, 2016)
  • The Foreign Exchange Management (Permissible capital Account Transactions), Regulations, 2000
  • Liberalized Remittance Scheme

General Permission

General permission has been granted to individual resident in India for purchase/acquisition of securities as under:

a) Out of funds held in the Resident Foreign Currency (RFC) account.

b) As bonus shares on existing holding of foreign currency shares.

c) When not permanently resident in India, from the foreign currency resources outside India.

d) To sell the shares so purchased or acquired.

It means if resident individual purchase or acquire any foreign security from his/her Resident Foreign Currency (RFC) Account or Exchange Earners Foreign Currency (EEFC) Account, then it will not be treated as Overseas Direct Investment and no compliances w.r.t ODI regulations needs to be followed.

Limits and Requirements for Overseas Direct Investment to be made under the Automatic Route

  • Indian Party/Resident Individual can invest up to the 400% of its net worth for any bonafide activity permitted as per the law of the host country.
  • Indian Party/Resident Individual is not on the RBI’s exporters’ caution list/list of defaulters or under investigation.
  • Indian Party/Resident Individual routes all the transactions relating to the investment through only one branch of an authorised dealer to be designated by the Indian Party.
  • Indian Party/Resident Individual must submit Part I of the Form ODI, duly completed, to the designated branch of an authorised dealer.
  • Investments made abroad should not be in entities engaged in the business of real estate, banking or business of providing financial services.
  • For investment by Resident Individual, Investment should be made within the ceiling of the Liberalised Remittance Schemee all resident individuals are allowed to freely remit up to USD 2,50,000 per financial year for any permissible current or capital account transaction or a combination of both. However, the investments made out of the balance in the EEFC/ RFC account shall also be counted while considering the ceiling under the LRS.
  • Indian Party/Resident Individual is allowed to make investments in an operating entity only and no step down subsidiary is allowed to be acquired or set up by such foreign entity.

RBI Approval

Any investment or financial commitment exceeding USD 1 billion in a financial year would require prior approval of the Reserve Bank.

Valuation Requirement

In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.

Method of Funding

Investment in an overseas entity may be funded out of one or more of the following sources:

  • drawal of foreign exchange from an AD bank in India;
  • capitalisation of exports;
  • swap of shares (valuation as mentioned in para B.1 (e) above);
  • proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
  • in exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India;
  • balances held in EEFC account of the Indian Party; and
  • proceeds of foreign currency funds raised through ADR / GDR issues.

Obligation of Indian Party

An Indian Party which has made direct investment abroad is under obligation to:

  • Receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within 6 months.
  • Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due and
  • Submit to the Reserve Bank, through the designated Authorised Dealer, every year on or before June 30, an Annual Performance Report (APR) in Part III of Form ODI in respect of each JV or WOS outside India.
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Author Bio

Qualification: CS
Company: DVG & Associates
Location: Mumbai, Maharashtra, IN
Member Since: 02 Feb 2018 | Total Posts: 60
CS Dhaval Gusani is a founder of DVG & Associates, Company Secretaries and Corporate Law Professionals. He is a Commerce Graduate and an Associate Member of the Institute of Company Secretaries of India (ICSI). He has cumulative experience of more than 3 years with Listed Company, Chartered Acco View Full Profile

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