Overseas Direct Investment: FEMA Compliance Rules for Indian Entities

Overseas Direct Investment (ODI) Compliances in India As Per FEMA Rules & Regulations

Overseas Direct Investments (ODIs) can serve as a catalyst for Indian companies, offering them an avenue to expand into international markets. However, navigating the labyrinth of regulations can be challenging. The Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) has established a regulatory framework to manage such overseas transactions. This article aims to be your definitive guide to understanding and navigating these complex rules to make your overseas investment journey smooth.

1. Preliminary Requirements

No Objection Certificate (NOC) with AD Bank

Before venturing into ODIs, individuals or entities that are defaulters with any bank, the Central Bureau of Investigation (CBI), Enforcement Directorate (ED), or Serious Fraud Investigation Office (SFIO) must secure a No Objection Certificate (NOC) from an Authorized Dealer (AD) Bank. This is a mandatory clearance to ensure that individuals or companies with adverse financial or criminal histories do not engage in foreign investments.

Form FC and Unique Identification Number (UIN)

Form FC, replete with requisite documentation, must be submitted to the AD Bank for acquiring a Unique Identification Number (UIN). The UIN acts as a unique identifier for the Indian entity making the investment, enabling the RBI to track the transaction. The AD Bank, after due verification, will process the transactions only upon the issuance of this UIN.

2. Reporting and Documentation

Annual Performance Report (APR)

The APR should be submitted by December 31 each year for every foreign entity where an investment has been made. However, exemptions are available. For instance, no APR is required for entities where the Indian investor holds less than 10% equity and has no other financial commitment.

Audited and Unaudited Financial Statements

While the APR generally requires audited financial statements, there are exceptions. For example, if the Indian entity doesn’t control the foreign company, and if the host country’s laws don’t mandate auditing, unaudited financials are acceptable.

Joint Reporting

For foreign entities where multiple Indian residents have invested, the APR submission duty falls on the individual holding the majority stake. In instances where stake ownership is equal, joint filing of the APR is permitted.

Evidence of Investment

Documentation substantiating the overseas investment must be submitted to the AD Bank within a stipulated timeframe of six months.

3. Financial Sources and Restrictions

Internal Accruals vs. Borrowed Funds

When it comes to foreign start-ups, the Indian entity must finance the investment from its internal accruals. Borrowing funds for this purpose is explicitly disallowed.

No Cash Investments

The regulatory framework clearly states that any form of cash investment is strictly prohibited. All transactions must occur through legitimate banking channels.

4. Penalties and Additional Considerations

Late Submission Fees (LSF)

Delayed reporting or documentation can result in late submission fees, which can be significant.

Liberalised Remittance Scheme (LRS)

Under the LRS, individual residents can invest up to $250,000 annually in foreign entities.

Tax Collected at Source (TCS)

Effective October 1, 2023, a 20% TCS is applicable for any remittance exceeding Rs 7 lakhs. This is a significant hike from the earlier rate of 5%.

5. Conclusion

Understanding and adhering to FEMA guidelines is not merely a regulatory requirement but also a pathway to successfully unlocking the potential that overseas markets offer. From the initial stages of obtaining necessary clearances like NOCs and UINs, to fulfilling ongoing compliance like APRs and audited financial statements, each step is designed to ensure the integrity and transparency of overseas investments made by Indian entities. Compliance is not just about avoiding penalties; it’s about enabling businesses to capitalize fully on their overseas ventures. Therefore, diligent attention to these rules is both a requirement and a strategy for success in the global arena.