Overseas Direct Investment means investment made outside India by an Indian either under the automatic route or the approval route or by subscription to the memorandum of a foreign entity or by way of contribution to the capital either by the stock exchange or private placement, by setting up Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).
In other words, Overseas Direct Investment in Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is a way of promoting business globally by Indian entrepreneurs. It is a medium of connecting two countries through business co-operation. Overseas Direct Investment is a business strategy in which a domestic firm expands operations toa foreign country.
Employing ODI is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad. There are numerous benefits of overseas investments.
Overseas investment involves the transfer of major benefits such as:
It does not only provide benefits to its businesses but also benefits the country as it promotes economic co-operation with the host countries with many other significant benefits. In simplified words, Overseas Direct Investment is an investment made by Indians outside India.
Overseas Direct Investment refers to the investments made in the Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) by way of:
OVERSEAS DIRECT INVESTMENT (ODI) LEGAL FRAMEWORK IN INDIA
ODI is governed by the following in India:
ELIGIBLE INDIAN PARTY
An Indian Party is eligible to make Overseas Direct Investment into a Joint Venture (JV) or Wholly Owned Subsidiary (WOS). An Indian Party is:
*Only those Partnership firms which are registered under Partnership act can make outside investment through automatic route. Unregistered Partnership firms require approval of RBI before making any outside investment.
Joint Venture: A foreign entity is termed as JV of the Indian Party when there are other foreign promoters holding the stake along with the Indian Party.
Wholly Owned Subsidiary: In case of WOS entire capital is held by the one or more Indian Parties
Note: ODI in Pakistan is allowed under the approval route. ODI in Nepal can be made in Indian Rupees only.
Indian Parties are prohibited from making investment or financial commitment in foreign entity engaged in:
CRITERIA FOR ODI UNDER AUTOMATIC ROUTE
An Indian Party can make outside investment through automatic route subject to the compliance of following conditions:
*Net Worth means paid up capital and free reserves however free reserves not defined in ODI Regulation.
Companies Act 2013 -Section 2(43) –Free reserves does not include Securities premium which is included in Net Worth definition under section 2(57).
SOURCE OF FUNDING
Funding for overseas direct investment can be made by one or more of the following sources:
Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of RBI.
For any capitalization of exports, alongwith Form ODI, a custom certified copy of the invoice raised towards the export must be submitted to RBI.
Indian software exporters are permitted to receive 25% of the value of their exports to an overseas
software start-up company in the form of shares without entering into Joint venture Agreements, with the prior approval of the Reserve Bank.
*American Depository Receipt (ADR) means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India.
Global Depository Receipt (GDR) means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India;
** In cases of swap of shares, valuation of the shares shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of FIPB is also required.
Financial Commitment means the amount of direct investment by way of contribution to equity, loan, guarantees, performance guarantees issued by an Indian Party to or on behalf of its overseas JV or WOS. the financial Commitment comprises of:
provided that if the outflow on account of invocation of performance guarantee results in the breach of the limit of the financial commitment in force, prior permission of the Reserve Bank is to be obtained before executing remittance beyond the limit prescribed for the financial commitment.
In cases where invocation of the performance guarantee breaches the ceiling for the financial commitment, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.
In respect of Initial Investment:
> An Indian Party shall submit Part I of the Form ODI within 30 days of Investment with designated Branch of Authorized Dealer Bank along with the following annexures:
> After receiving the aforesaid documents, AD Bank shall verify all the Documents and if found in order, forwards the same to RBI.
> RBI then allots a Unique Identification Number (UIN) for that particular JV/WOS.
> UIN No. is allotted by RBI to Indian Party in respect of each JV/WOS outside India.
In respect of Subsequent Investment:
> Report to the Authorized Dealer Bank by Submitting the Part I of the Form ODI within 30 days of Investment along with all documents as prescribed above.
> An Indian Party shall quote the UIN No. as allotted by RBI in Part I of form ODI.
> Contents of Part I of the form ODI:- All ODI forms are submitted to the AD Bank in physical. Part I of form is divided in sections which includes the following:
POST INVESTMENT OBLIGATIONS OF INDIAN PARTY
i. Receive Share Certificates/Other Documentary Evidence: An Indian Party shall receive share certificates/ any other documentary evidence of investment in the overseas JV / WOS and submit the same to the designated AD within 6 months.
ii. Repatriation of Dues: Repatriate to India all dues receivable from the overseas JV / WOS, like dividend, royalty, technical fees etc within 60 days of its falling due, or such further period as the Reserve Bank may permit.
iii. Repatriation of Sale Proceeds in case of Disinvestment: On disinvestment, repatriate the sale proceeds immediately or not later than 90 days from the date of sale of the shares /securities.
i. Submission of Annual Performance Report (APR): Submission of APR in Part II of Form ODI in respect of each JV/WOS outside India set up or acquired by the Indian party by 31 December every year.
ii. Submission of Return on Foreign Liabilities and Assets: File Foreign Liabilities and Assets (FLA) return every year by 15 July.
Transfer/Sale of shares without write off of the investment
An Indian Party, under the automatic route, may transfer by way of sale to another Indian Party or to a person resident outside India, any share or security held by it in a JV or WOS outside India subject to the following conditions:
Transfer/sale of shares involving write off of the investment
Indian Party may disinvest with write off under the automatic route where the amount repatriated after disinvestment is less than the original amount invested subject to the following:
All other conditions as applicable in disinvestment without write off shall mutatis mutandis apply for Disinvestment with write off.
Prior approval is required from RBI, if does not satisfy the conditions laid down above for undertaking any disinvestment in its JV/WOS abroad.
Restructuring of the balance sheet of the overseas entity Writing off Capital or Other Receivables:
The Indian Party who has set up WOS abroad or have at least 51 per cent stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS, within permissible limit which are as follows:
Compliances followed by the Indian Party:
OVERSEAS DIRECT INVESTMENTS BY RESIDENT INDIVIDUALS
A resident individual (single or in association with another resident individual or with an Indian Party), may make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.
> Investment in overseas JV / WOS only by way of equity / compulsorily convertible preference shares.
> Investment in overseas JV / WOS only by way of equity / compulsorily convertible preference shares.
> JV / WOS to be engaged in bonafide business activities except real estate / banking / financial services.
> Resident individual not to be on RBI caution / defaulters list.
> Limit of investment in JV / WOS as per LRS limit (currently USD 250,000 per person per annum).
> Investment made from EEFC / RFC account also included in prescribed LRS limit.
> Undertaking financial commitment on behalf of the JV or WOS other than ODI (subscription to equity/ CCPS) is prohibited.
> JV / WOS to be operating entity only – No step down subsidiary to be acquired or set up by JV / WOS.
> Write off not permitted in cases of disinvestments.
Valuation /Reporting and Post investment obligations same as applicable to ODI by Indian Party.
PURCHASE/ ACQUISITION OF FOREIGN SECURITIES IN CERTAIN CASES
General permission has been granted to a person resident in India who is an individual –
Resident Indian may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days from the date of sale of such securities.
In all other cases, approval of the Reserve Bank is required to be obtained before acquisition of a foreign security.
OVERSEAS DIRECT INVESTMENT BY REGISTERED TRUST AND SOCIETIES
Registered Trusts and Societies engaged in manufacturing/educational/hospital sector are allowed to make investment in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve Bank.
Eligibility Criteria for Trust
(i) The Trust should be registered under the Indian Trust Act, 1882;
(ii) The Trust deed permits the proposed investment overseas;
(iii) The proposed investment should be approved by the trustees;
(iv) The AD Category – I bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is engaged in a bonafide activity;
(v) The Trust has been in existence at least for a period of three years;
(vi) The Trust has not come under the adverse notice of any Regulatory/Enforcement agency like the Directorate of Enforcement, Central Bureau of Investigation (CBI), etc.
Eligibility Criteria for Society
(i) The Society should be registered under the Societies Registration Act, 1860.
(ii) The Memorandum of Association and rules and regulations permit the Society to make the proposed investment which should also be approved by the governing body/council or a managing/ executive committee.
(iii) The AD Category – I bank is satisfied that the Society is KYC (Know Your Customer) compliant and is engaged in a bonafide activity;
(iv) The Society has been in existence at least for a period of three years;
(v) The Society has not come under the adverse notice of any Regulatory /Enforcement agency like the Directorate of Enforcement, CBI etc.
Valuation /Reporting and Post investment obligations are same as applicable to ODI by Indian Party.