Overseas Direct Investment (ODI) and Establishment of Branch Abroad

Explore Overseas Direct Investment (ODI) guidelines by the Reserve Bank of India, covering eligibility, prohibited sectors, investment limits, reporting requirements, and penalties for non-compliance. Learn about ODI for Indian parties and resident individuals, with insights into FEMA regulations. Additionally, understand the establishment of branches abroad, eligibility criteria, remittance of funds, conditions, and reporting requirements. Stay informed about prohibited sectors, application processes, and compliance for seamless overseas business expansion.

Overseas Direct Investment (ODI)

The Reserve Bank of India (RBI) has published guidelines for Overseas Direct Investments (ODI) via FEMA (Transfer or Issue of Foreign Security) Regulations, 2004 as amended from time to time.

What is Overseas Direct Investment?

According to the Section 2(e) of these Regulations, any investment made by any person outside India by way of:

• contribution to the capital or subscription to the Memorandum of the foreign entity; or
• purchase of existing shares of foreign entity which can be joint venture or wholly owned subsidiary;

is considered to be an Overseas Direct Investment, however, it does not include portfolio investment.

What is the nature of such transaction?

According to Section 2(e) of FEMA 1999, Capital Account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or alters the assets or liabilities in India of persons resident outside India.

Accordingly, the investments made in the nature of ODI by way of contribution to capital, subscription to equity or acquisition of shares shall be considered as Capital A/c transactions.

Who is Eligible for making ODI?

Such Investment can be made either by an Indian Party or a Resident Individual.

“Indian party” means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank.

Further, the RBI inserted the Regulation 20A via the FEMA (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2013, w.e.f. 5-3-2013:

Regulation. 20A.  A resident individual (single or in association with another resident individual or with an ‘Indian Party’ as defined in this Notification) satisfying the criteria as per Schedule V of this Notification, 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.

Accordingly, Resident Individuals subject to Schedule V are now eligible to make ODI and should be read along with the ‘Indian Party’ and shall comply all such requirements as ‘Indian Party’.

Schedule V:

1. Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity.

2. The JV or WOS abroad shall be engaged in bona fide business activity.

3. Resident individual is prohibited from making direct investment in a JV / was [set up or acquired abroad individually or in association with other resident individual and / or with an Indian party] located in the countries identified by the Financial Action Task Force (FATF) as “non cooperative countries and territories” as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank.

4. The resident individual shall not be on the Reserve Bank’s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation I enforcement agency or regulatory body.

5. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual under Liberalised Remittance Scheme (LRS) as prescribed by the Reserve Bank from time to time. (Currently, the RBI prescribed limit under LRS is USD 2,50,000 for a financial year)[Explanation: The investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit prescribed under LRS.]

6. The JV or was, to be acquired / set up by a resident individual under this Schedule, shall be an operating entity only and no step-down subsidiary is allowed to be acquired or set up by the JV or WOS.

7. For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification.

8. The financial commitment by a resident individual to I on behalf of the JV or was, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited.

What are Prohibited Sectors of Investment?

1. An Indian Party can make overseas direct investment in any bonafide activity only.

2. Real estate as defined in Notification No. FEMA 120/RB-2004 dated July 7, 2004 and banking business are the prohibited sectors for overseas direct investment. Real estate business means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges. However, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO, RBI.

What is the limit for Investment?

For Resident Individuals: As per the Schedule V, clause (v) above, the limit for investment abroad by Resident Individuals shall by as per the Liberalised Remittance Scheme (LRS) as prescribed by the Reserve Bank from time to time. (Currently, the RBI prescribed limit under LRS is USD 2,50,000 for a financial year)

For Companies: The total financial commitment of the Indian party in Joint Ventures/Wholly Owned Subsidiaries shall not exceed US$ 1 billion or its equivalent in any one financial year or 400% of the net worth, whichever is lower.

A company can make investment beyond the stipulated limit after exhausting the available limit by obtaining a specific permission from Reserve Bank under a block allocation.

What are Reporting Requirements & Other Compliances?

1. Share Certificates: An Indian Party or Resident Individual shall comply with requirement of Regulation 15 by receiving share certificates or any other documentary evidence of investment in the overseas JV or WOS to the satisfaction of RBI. Such share certificate/documentary evidence must be received within 6 months from the date of effecting remittance.

2. Form ODI: The resident individual, making overseas direct investments under the provisions of this Schedule V, shall submit Part I of the Form ODI, duly completed, to the designated authorised dealer, within 30 days of making the remittance.

AD Bank Obligation – The investment, as made by a resident individual, shall be reported by the designated authorised dealer to the Reserve Bank in Form ODI Part I and II within 30 days of making the remittance.

3. Board Resoultion: In case of Company making ODI, a certified copy of the board resolution authorizing such investment shall be required to be submitted along with Form ODI. 

4. Networth Certificate: The Indian Party making ODI shall obtain Net Worth Certificate of the company in order to determine the upper limit as prescribed from time-to-time. 

5. Valuation Report: In case of acquisition of existing Company where ODI where the investment is more than USD 5 million, the Valuation Report shall be obtained from 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.

6. Annual Performance Report (APR): Indian Party or Resident Individual are required to comply with reporting requirement of Regulation 15 by submitting 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. APR shall be submitted through Authorised Dealer Bank and it shall be based on Audited Annual accounts of previous year of JV/WOS.

*Where law of host country does not mandatorily require an audit of JV or WOS, APR shall be based on unaudited Books of accounts subject to the following conditions:

1. The Statutory Auditors of the Indian Party shall certify that ‘the un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’; and,

2. That the un-audited annual accounts of the JV / WOS have been adopted and ratified by the Board of the Indian Party.

7. Return on Foreign Liabilities and Assets (FLA): All Indian Companies which have made Overseas Direct investment are  required to file an Annual Form on Foreign Liabilities and Assets (FLA) every year by 15 July. It is pertinent to note that reporting requirement for Return of FLA is not applicable to Individuals.

8. Disinvestment: The disinvestment by the resident individual may be reported by the designated AD to the Reserve Bank in Form ODI Part IV within 30 days of receipt of disinvestment proceeds.

What is Penalty for Non-Compliance?

As per RBI notification Any non-compliance with respect to the instruction for submission of Form ODI Part I, Part II and Part III shall be treated as contravention of FEMA Regulations read with amendments & notification issued from time-to-time as amended and the Reserve Bank will take a serious view on non-compliance with the guidelines / instructions and initiate penal action as considered necessary.

Accordingly, the seriousness of non-compliance shall be evaluated by the RBI on case-to-case basis and shall issue order levying penalty accordingly. However, FEMA guidelines issued specify the general penalty in case of contravention of any provision, rule regulations etc. as follows:

General Penalty: As per Section 13 of the FEM Act, if any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty as mentioned below:

• Where such amount is quantifiable: It is thrice the sum involved in such contravention.
• Where the amount is not quantifiable: Upto Rs. 2,00,000 (two lakh rupees).
• And where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed u/s. 37A (at present the limit prescribed is ₹ one crore), then such person is liable to:

1. Penalty up to 3 times the sum involved.

2. Confiscation of the value equivalent situated in India.

3. Imprisonment for a term which may extend to 5 year + fine.

4. The adjudicating officer / competent authorities may also confiscate any currency, security or property in addition to imposing penalty. If a person does not pay up the penalty within 90 days, he is liable for civil imprisonment.

Further, as per RBI Master Direction-Compounding of Contraventions under FEMA, 1999 (Updated upto May 24, 2022) the penalty for non-filing of APR/FLA/Share Certificate are as follows:

However, kindly note that penalty for non-filing of Form ODI is not specifically mentioned and the same would still be governed by Section 13 of the Act.

Establishment of Branch Abroad

Eligibility to establish a Branch Outside India:

A person resident in India being a Firm or Company or Body Corporate registered in India is eligible to establish a branch outside India. A general permission is available for opening of Bank Account for the purpose of meeting the Branch Expenses abroad subject to certain limits / conditions as specified below.

Quantum of Remittance of Funds for the purpose of setting up Branch abroad:

AD banks in India are permitted to remit funds for

1. Initial Expenses: Remittance up to 15% of the average annual sales / income or turnover during the last 2 financial years or up to 25% of the net worth, whichever is higher

2. Recurring Expenses: Remittance up to 10% of the average annual sales / income or turnover during the last 2 financial years

Conditions for establishing a Branch Outside India:

General terms and conditions for opening branch / office / representative abroad are:

1. The overseas branch / office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity.

2. The overseas office (trading / non-trading) / branch / representative should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank. Any funds rendered surplus should be repatriated to India.

3. Exchange released by the authorized dealer should be strictly utilized for the purpose(s) for which it is released. The unused exchange may be repatriated to India under advice to the authorized dealer.

4. The overseas bank account opened, held or maintained shall be closed,

• • if the overseas branch / office is not set up within six months of opening the account, or
  • within one month of closure of the overseas branch / office, or
  • where no representative is posted for six months, and the balance held in the account shall be repatriated to India;

5. The renewal of remittance facility after two years may be granted, provided proper accounts of utilization of foreign exchange released are furnished to the authorized dealer.

Reporting Requirements:

1. The details of bank accounts opened in the overseas country should be promptly reported to the AD Bank.

2. The following statements should be submitted by the applicant to the authorized dealer:

• • A statement showing details of initial expenses incurred together with suitable documentary evidence, wherever possible, within three months from the date of release of exchange for that purpose.
  • Annual account of trading/non-trading office abroad duly certified by statutory Auditors / Chartered Accountants.

3. Correspondence, if any, in original together with photocopies regarding the arrangement made in foreign country for posting of representative / establishment of branch / office.

4. Bank certificates, in Form BCX (certificate of export), together with photocopies thereof for the immediately preceding four calendar half years in support of export realizations.

Acquisition of Assets outside India: Branch / office / representative may buy office equipment and other assets required for normal business operations. Funds required for this may be remitted by the Indian entity from India as a current account transaction.

However, transfer or acquisition of immovable property outside India, other than by way of lease not exceeding five years, by the overseas branch / office/ representative will be subject to RBI regulations.

Notably, the above facility cannot be used by e-commerce companies who are, for example, in the business of providing an e-commerce platform to foreign sellers and buyers and wish to establish a collection account in a foreign country without establishing a branch office or representative in that country.

Application to the Authorised Dealer (AD) Bank: The Indian firm / companies should submit applications to their AD bankers in Form OBR. The application Form OBR needs to be filled in with necessary details along with supporting documents. After which the foreign exchange is released by the AD bank. The recurring (expenditure) remittance facilities are allowed initially for a period of two years only, after obtaining confirmation from the applicant that they have completed all legal and other formalities in India and abroad in connection with the opening of trading/non-trading office or for posting a representative abroad.

Details to be provided in the application:

1. Particulars of Turnover duly certified by auditors.

2. Declaration to the effect that they have not approached / would not approach any other authorized dealer for the facility being applied for.

3. Exporter’s Code Number allotted by Reserve Bank.

4. Nature of the applicant’s business in India.

5. Particulars of foreign currency balances/securities, if any, held by the applicant.

6. Present arrangements for applicant’s representation in the country/territory concerned if any. If there is any agency arrangement, its full details including the number and date of Reserve Bank’s approval and commission paid during the past three years.

7. Details of export realizations for the past two years.

8. Commodity-wise/country-wise break up of exports realized in the last two years. Application is for appointing an agent (on fixed remuneration basis), or for opening a trading branch, or for a representative liaison office/non-trading branch.

9. Place and country of posting of agent/representative office/branch.

10. Territories/countries to be covered by the proposed agent/representative office/branch.

11. Details of business to be conducted abroad by the agent/representative office/branch.

12. Initial Establishment Expenses.

13. Recurring expenses per month.

Off-site and on-site contracts: The overseas office / branch of software exporter company/firm may repatriate to India 100 per cent of the contract value of each ‘off-site’ contract.

In case of companies taking up ‘on site’ contracts, they should repatriate the profits of such ‘on site’ contracts after the completion of the said contracts.

An audited yearly statement showing receipts under ‘off-site’ and ‘on-site’ contracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the AD Category – I banks.

Prohibited Sectors:

1. Indian parties are prohibited from investing in a foreign entity engaged in real estate activities.

Note: Construction activities or development of townships are not prohibited. The foreign entity should not be engaged in buying and selling of real estate or instruments that relate to rights in real estate. Investment in foreign banks can be done only with the prior approval of Reserve Bank of India.

2. In addition, activities that are illegal in host country are prohibited. Further, the law does nowhere mention about prohibition of investing in an activity that is illegal in India but legal in host country.

3. The list of Transactions which are prohibited under Foreign Exchange Management (Current Account Transactions) Rules, 2000 as per Schedule –I are as follows:

• Remittance out of lottery winnings Remittance of income from racing/riding, etc or any other hobby.
• Remittance for purchase of lottery tickets, banned / prescribed magazines, football pools, sweepstakes, etc
• Payment on commission of exports made towards equity investment in JV/WOS abroad of Indian companies
• Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
• Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea & tobacco Payment related to “Call Back services” of telephones
• Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

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Disclaimer: The information provided by the author in the article is for general informational purposes only. One must consult respective professional before proceeding further for practical applicability of above information. All information provided is in the good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information in the article.