All About Overseas Direct Investment

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).

CS Shikha Mehra


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).

However, an eligible Indian party is free to acquire either a partial stake (JV) or the entire stake (WOS) in an already existing entity overseas, provided the valuation is as per the laid down norms..


General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:

a. Out of funds held in the 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.

General permission is also available to sell the shares so purchased or acquired. A resident Indian can remit, up to the limit prescribed by the Reserve Bank from time to time, per financial year under the Liberalised Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of securities and also setting up/acquisition of JV/WOS overseas with effect from August 5, 2013


A. Automatic Route

B. Approval Route

A. Automatic 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. 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 investments. However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.

An Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 100 per cent of the net worth as on the date of last audited balance sheet of the Indian party, i.e. 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, Limited Liability Partnership (LLP) , registered under the Limited Liability Partnership Act, 2008 (6 of 2009), making investment in a JV/WOS abroad and includes any other entity in India as may be notified by the Reserve Bank.

The ceiling of 100 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners’ Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs.

For the purpose of determining the ‘total financial commitment’ within the limit of 100% as specified above, the following shall be reckoned, namely:

a. 100% of the amount of equity shares;

b. 100% of the amount of compulsorily and mandatorily convertible preference shares;

c. 100% of the amount of other preference shares;

d. 100% of the amount of loan;

e. 100% of the amount of guarantee (other than performance guarantee) issued by the Indian party;

f. 100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS of the Indian party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian party.

g. 50% of the amount of performance guarantee issued by the Indian party provided that 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.

Ø Compulsorily Convertible Preference Shares (CCPS) shall be treated at par with equity shares.

Limits and requirements for overseas direct investment to be made under the Automatic Route:

The criteria for overseas direct investment under the Automatic Route are as under:

i. The Indian Party can invest up to the prescribed limit of its net worth (as per the last audited Balance Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host country. The prescribed limit vis-a-vis the net worth will not be applicable where the investment is made out of balances held in the EEFC account of the Indian party or out of funds raised through ADRs/GDRs;

ii. The Indian Party is not on the Reserve Bank’s exporters’ caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) /RBI or any other credit information company as approved by the Reserve Bank or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and

iii. The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.

Procedure to be followed by an Indian party to make overseas direct investment in a JV/WOS under the Automatic Route

The Indian Party intending to make overseas direct investment under the automatic route is required to fill up Form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.

However, no prior registration with the Reserve Bank is necessary for making direct investments under the automatic route.

After the online report of the first remittance / investment in Form ODI Part I & II for a JV / WOS, a Unique Identification Number (UIN) for that particular JV/WOS is generated automatically and instantaneously. Subsequent investments in the same JV / WOS can be made only after allotment of the UIN.

B. Approval Route:

Proposals not covered by the conditions under the Automatic route require prior approval of the Reserve Bank for which a specific application in Form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks. Some of the proposals which require prior approval are:

i) Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet;

ii) Investments in Overseas Unincorporated entities in the oil sector by resident Corporates exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet provided the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment.

However, Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated / incorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under the automatic route;

iii) Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria;

iv) Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India;

Applications in Form ODI- Part I may be forwarded through the designated Authorized Dealer Category – I bank to:

The Chief General Manager
Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Central Office
Amar Building, 5th Floor
Mumbai 400 001.


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 / 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 Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.

7. Proceeds of foreign currency funds raised through ADR / GDR issues.


Loan and guarantee cannot be extended to an overseas entity only if there is already existing equity / CCPS participation by way of direct investment.

However, based on the business requirement of the Indian Party and legal requirement of the host country in which JV/WOS is located, proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route.


An Indian Party will have to comply with the following: –

i. receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months;

ii. repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;

iii. submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party;

iv. report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and

v. in case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.

Ø Annual Performance Report

Annual Performance Report is a Report which is submitted on annual basis on the functioning of overseas JV / WOS.

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

a. The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and

b. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.

Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party.


Disinvestment by the Indian party from its JV / WOS abroad may be by way of:

i. transfer / sale of equity shares to a non-resident / resident

ii. by way of liquidation / merger / amalgamation of the JV / WOS abroad.


A. Disinvestment from JV / WOS without write off

The Indian Party may disinvest without write off under the automatic route subject to the following:

i. the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;

ii. if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS;

iii. the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS;

iv. the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;

v. the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India; and

vi. Other terms and conditions prescribed under Regulation 16 of the Notification ibid.

B. Disinvestment from JV / WOS involving write off

An Indian Party may disinvest, under the automatic route, involving write off in the under noted cases:

i. where the JV / WOS is listed in the overseas stock exchange;

ii. where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;

iii. where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does not exceed USD 10 million; and

iv. where the Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.

Categories: Fema / RBI

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