Overseas Direct investment (ODI)

Overseas Direct Investment Rules  | Regulation and Compliance Requirements

1. Important Definition

Direct Investments:

Direct investment outside India means investments, 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, signifying a long-term interest in the foreign entity (JV or WOS).

2. Important Meaning

2.1. “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.

A foreign entity is termed as JV of the Indian Party/Resident Indian when there are other foreign promoters holding the stake along with the Indian Party.

In the case of WOS, the entire capital is held by the one or more Indian Party/Resident Indian.

2.2 Indian Party: An Indian Party is 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 or a Limited Liability Partnership (LLP) incorporated under the LLP Act, 2008 and any other entity in India as may be notified by the Reserve Bank.

2.3 Resident individual: Resident individual should be read along with the Indian Party.

2.4 Designated Authorized Dealer:

The Indian party/ Resident Individual is required to route all transactions in respect of a particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the ‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an Authorized Dealer.

Note: in case the Indian Party / Resident Individual wants to switch over to another AD, an application by way of a letter may be made to the Reserve Bank of India after obtaining an NOC from the existing Authorized Dealer.

3. Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2013

(i) These Regulations shall be called the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2013.

4. Insertion of New Regulation 20A

In Part II, after Regulation 20, the following Regulation shall be inserted:

“20A.  Acquisition or Setting up of a JV or WOS abroad by resident individual

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.”

5. Insertion of New Schedule V

After Schedule IV, the following Schedule shall be inserted:

“Schedule V [See Regulation 20A]

5A. Overseas Direct Investments by Resident Individuals (Schedule V)

1. Resident individuals are 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 bonafide business activity.

3. 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 / enforcement agency or regulatory body.

4. At the time of investments, the permissible ceiling shall be within the overall ceiling prescribed for the resident individual under the Liberalised Remittance Scheme (LRS) as prescribed by the Reserve Bank from time to time.

[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 WOS, 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 / on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited.

5B. Post Investment Changes (Reporting Requirements

Any alteration in shareholding pattern of the JV or WOS may be reported to the designated AD within 30 days including reporting in the Annual Performance Report as required to be submitted in terms of Regulation 15 of this Notification.

5C. Disinvestment by Resident Individuals

1. A resident individual, who has acquired / set up a JV or WOS under the provisions of this Schedule, may disinvest (partially or fully) by way of transfer / sale or by way of liquidation / merger of the JV or WOS.
2. Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.
3. The disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment and the same may be reported to the designated AD.
4. No write off shall be allowed in case of disinvestments by the resident individuals.

5D. Reporting Requirements

1. The resident individual, making overseas direct investments under the provisions of this Schedule, shall submit Part I of the Form ODI, duly completed, to the designated authorised dealer, within 30 days of making the remittance.
2. 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. The obligations as required in terms of Regulation 15 of this Notification shall also apply to the resident individuals who have set up or acquired a JV or WOS under the provisions of this Schedule.
4. 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.”

6. Application through an Automatic Route:

Under the Automatic Route, an Indian Party/ Resident Individual does not require any prior approval from the  Reserve  Bank  for  making overseas direct investments in a JV/WOS abroad.

7. Process:

• The Indian Party should approach an Authorized Dealer Category – I bank with an-application in Form  ODI  and  the  prescribed  enclosures  /  documents  for  effecting the remittances towards such
• Allocation of Unique Identification Number by RBI.
• Remittance
• Compliance and Reporting Post Acquisition.

8. Important Remarks

1. All Indian parties/ Resident Individual are required to undertake all the Overseas Direct.
2. Investments through the respective AD bank through which the UIN is obtained.
3. Estimated cost/ Fair Value of the overseas acquisition – The amount of the estimated cost/ fair value should be in FCY (Foreign Currency)
4. Financial Commitment with the current JV/ WOS – The IP / RI shall furnish the outstanding financial commitment towards equity, loan and guarantee.
5. The certificate by the statutory auditor shall be required only in case of IP and not in case of RI.
6. Level of step down Subsidiary (SDS) should be calculated treating the JV/ WOS as the parent. So an SDS under the direct JV/ WOS should be treated as first level SDS. Accordingly an SDS under the first level SDS would be treated as second level SDS.
7. APR is to be certified by statutory auditors of the IP and submitted, through the designated AD bank every year by December 31st as long as the JV / WOS is in existence.
8. The IP / RI shall ensure that all the previous year APR (Annual Performance Report) has been submitted to the designated AD bank.

9. Type of investment can be wholly owned step down subsidiary (WO SDS) or Step Down Joint Venture (JV SDS).

Level of step down Subsidiary (SDS) should be calculated treating the JV/ WOS as the parent. So an SDS under the direct JV/ WOS should be treated as first level SDS. Accordingly an SDS under the first level SDS would be treated as second level SDS.

Reserve Bank has given General Permission to a resident individual to acquire foreign securities to the extent of the minimum  number  of  qualification  shares  required  to  be  held  for  holding  the  post  of  Director.  Accordingly,  resident individuals are permitted to remit funds under general permission for acquiring qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located and  the  limit  of  remittance  for  acquiring  such  qualification  shares  shall  be  within  the  overall  ceiling  prescribed  for  the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

The qualification shares held by the resident director should be reported in the capital structure of the JV/ WOS. The type of the Indian entity should be selected as “other Indian entity”

 Funding for overseas direct investment can be made by one or more of the following sources:

1. Drawal of foreign exchange from an AD bank in India.

2. Swap of shares (refers to the acquisition of the shares of an overseas JV / WOS by way of exchange of the shares of the Indian party).

3. Capitalization of exports and other dues and entitlements.

4. Proceeds of External Commercial Borrowings (ECB) / Foreign Currency Convertible Bonds.

5.     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 by Government of India in the matter.

6. Balances held  in the Exchange  Earners  Foreign  Currency  account  of  the  Indian  Party  maintained  with  an  Authorized Dealer.

7.  Proceeds of foreign currency funds raised through ADR (American Depositary Receipt) / GDR (Global  issues.

10. Important Documents are 

1. Networth Certificate of Individual/ Company
2. Valuation Report of the Company where ODI will take place.If required.
3. APR Form (Upon Completion of ODI, Filing of APR Form with RBI).
4. FLA (Foreign Liabilities and Asset Account) reporting with RBI on or before 15th July every year.(Applicable only to Company) Individuals are not covered for FLA reporting.

11. Ceiling of Remittance

In the case of Company: 400% of Net-worth as per latest Audited Financial Statements/ Audited Interim Financial Statements

In Case of Resident individual: Restriction upto Ceiling limit under LRS.