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 includes
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
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
Any investment or financial commitment exceeding USD 1 billion in a financial year would require prior approval of the Reserve Bank.
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:
Obligation of Indian Party
An Indian Party which has made direct investment abroad is under obligation to: