Investing in companies or assets outside of India is known as overseas direct investment. For Indian citizens looking to diversify their portfolios, open up new markets, and expand their businesses abroad, this can be a rewarding strategy. Indian citizens should be informed of the rules and recommendations (RBI)The Reserve Bank of India has established before making any overseas direct investments, nevertheless.

The following three categories of investments make up an ODI:

1. Purchasing equity in any unlisted firm or subscribing to a foreign entity’s memorandum of association.
2. An investment of 10% or more of a stated foreign company’s paid-up equity capital.
3.  An investment that represents less than 10% of a stated foreign company’s paid-up equity capital shall be controlled.

Who is eligible to make ODI?

Investments in entirely owned subsidiaries or joint ventures can be made by public and private limited corporations, partnership companies registered under the Indian Partnership Act of 1932, and limited liability partnerships registered under the LLP Act of 2008. Additionally, residents are able to invest abroad. The LRS allows for investments in mutual funds, foreign securities, real estate, and other assets totaling up to USD 250,000 every fiscal year. The investment must abide by the RBI’s reporting guidelines, which include submitting the appropriate paperwork to the RBI and authorized dealers.

Please note that Sole proprietorship and unregistered partnership entities are not eligible to make ODI in WOS or JVs under automatic route.

Mode of ODI payment?

1. Payment mode: The remittance for overseas investments should be made through an Authorized Dealer (AD) bank, which is a bank authorized by the RBI to deal in foreign exchange transactions.
2. Purchase of foreign currency: The foreign currency required for overseas investments must be purchased from the AD bank at the prevailing market rate.
3. Escrow accounts: The RBI may permit the use of escrow accounts or special accounts in specific cases, subject to certain conditions and safeguards.
4. Routing transactions: All transactions related to overseas investments must be routed through the same AD bank, ensuring compliance with the guidelines issued by the RBI.
5. ODI in the form of cash is not permitted.
6. Indian entities may make remittances to their office or branch abroad only for normal business operations. Hence, No ODI is permitted for investment into the branch offices abroad

Knowledge of the Automatic Route

Any monetary commitment up to USD 1 billion in a financial year does not require prior RBI clearance if the Indian party’s entire commitment falls within the acceptable limit under the Automatic Route (i.e., falls within 400% of net worth as per the most recent audited balance sheet).

The Role of Authorized Dealer Category – I Banks

All transactions related to overseas investments must be routed through the same AD bank, ensuring compliance with the guidelines issued by the RBI.

Components of Financial Commitments

Financial commitments in overseas JVs/WOS consist of equity shares, Compulsorily Convertible Preference Shares (CCPS), other preference shares, loans, guarantees (excluding performance guarantees), and bank guarantees (backed by a counter guarantee/collateral by the Indian party).

1. 100% of the number of equity shares and/ or Compulsorily Convertible Preference Shares (CCPS);
2. 100% of the number of other preference shares;
3. 100% of the amount of the loan;
4. 100% of the amount of guarantee (other than performance guarantee) issued by the Indian Party;
5. 100% of the amount of the bank guarantee issued by a resident bank on behalf of the Indian Party’s JV or WOS, provided that the bank guarantee is supported by a counter-guarantee or collateral.
6. 50% of the amount of the performance guarantee issued by the Indian Party, with the condition that prior Reserve Bank approval must be obtained before sending money beyond the financial commitment’s limit if the outflow resulting from the performance guarantee’s invocation causes it to go over.

Conditions for Investments and Financial Commitments under automatic route

Investments and financial commitments in overseas JVs/WOS must adhere to specific conditions:

1. The Indian party/entity may extend loans/guarantees only to overseas JVs/WOS in which it has equity participation. Proposals for financial commitments without equity contributions may be considered by the RBI under the approval route.
2. Indian parties should not be on the RBI’s caution list, defaulters list, or under investigation by any investigation/enforcement agency or regulatory body.
3. Share valuation must be performed by a Category I Merchant Banker registered with SEBI or an Investment Banker/Merchant Banker outside of India registered with the relevant regulatory authority in the host country for investments exceeding USD 5 million in partial or complete acquisitions.
4. When an investment is made through a share swap, the valuation of the shares must be performed by a Category I Merchant Banker registered with SEBI or an investment banker outside of India registered with the relevant regulatory body in the host country.
5. In cases where a registered partnership firm invests in an overseas JV/WOS, individual partners may hold shares on behalf of the firm if the host country’s regulations or operational requirements warrant such holdings.
6. Indian parties may acquire shares of a foreign company in exchange for ADRs/GDRs, subject to specific conditions.
7. Investments in Nepal are permitted only in Indian Rupees. Investments in Bhutan can be made in Indian Rupees or freely convertible currencies. All dues receivable on investments and their sale/winding-up proceeds must be repatriated in freely convertible currencies.
8. Investments in countries identified by the Financial Action Task Force (FATF) as “non-cooperative countries and territories” are not permitted. Investments in Pakistan are permissible under the approval route.

Methods of funding for overseas direct investment include:

1. Drawing foreign exchange from an AD bank in India
2. Capitalizing exports
3. Swapping shares 
4. Utilizing proceeds from External Commercial Borrowings (ECBs) or Foreign Currency Convertible Bonds (FCCBs)
5. Exchanging ADRs/GDRs issued by the relevant schemes and guidelines
6. Using balances held in the EEFC account of the Indian Party
7. Proceeds from foreign currency funds raised through ADR/GDR issues.

The obligation of Indian parties (IP) and resident individuals (RI) after making an overseas direct investment:

1. Receive share certificates or other evidence of investment within six months (or a period permitted by the Reserve Bank) from the date of remittance, capitalization, or permission for capitalization.
2. Repatriate all dues from the foreign entity, such as dividends, royalties, and technical fees, within 60 days of falling due (or a period permitted by the Reserve Bank).
3. Submit an Annual Performance Report (APR) in Part II of Form ODI for each JV/WOS outside India by December 31 every year, based on the audited accounts from the preceding year, along with any other prescribed reports or documents.

Additional points to note:

a. The designated AD bank must monitor the receipt of documents and ensure their authenticity.

b. Certification of APRs by a Statutory Auditor or Chartered Accountant is not required for resident individuals; self-certification is acceptable.

c. If multiple IPs/RIs have invested in the same overseas JV/WOS, the one with the maximum stake is responsible for submitting the APR. Alternatively, stakeholders can mutually agree to assign this responsibility to a designated entity.

d. Reporting requirements, including submission of APR, also apply to investors in unincorporated entities in the oil sector.

e. If the host country’s law does not mandate auditing of JV/WOS books, the APR may be submitted based on un-audited accounts if certain conditions are met (e.g., certification by the Indian Party’s Statutory Auditors, adoption and ratification of accounts by the Indian Party’s Board, and not being located in a country under FATF observation or requiring enhanced due diligence).

f. All Indian businesses that have received or made Foreign Direct Investment (FDI) in the past two years must submit an annual report on foreign liabilities and assets (FLA) to the Reserve Bank of India. Every year, the FLA return has to be emailed by July 15.

Overseas Direct Investment (ODI) by Approval Route:

1. Prior approval from the Reserve Bank of India (RBI) is required for all cases of direct investment or financial commitment abroad that do not fall under the automatic route. To seek approval, applicants must submit Form ODI along with necessary documents through their Authorized Dealer Category – I bank.
2. When evaluating such applications, the Reserve Bank takes into account a number of factors, such as: 

• The overseas JV/WOS’s viability; 

• The contribution to international trade and benefits to India; 

• The financial situation and business history of the Indian Party and the foreign entity; 

• The Indian Party’s expertise and experience in the same or a closely related field as the JV/WOS.

 

3. Investments in energy and natural resources sectors exceeding the prescribed limit of financial commitment will be considered by the RBI. Applications must be forwarded by the AD Category-I – I bank as per the established procedure.

4. Proprietorship concerns, unregistered partnership firms, registered trusts, and societies engaged in manufacturing, education, or hospital sectors may make investments in a JV/WOS outside India with prior approval from the RBI. They must meet specific eligibility criteria and submit an application in Form ODI through the AD Category-I – I bank.

• Proprietorship concerns and unregistered partnership firms must be classified as ‘Status Holders’ as per the Foreign Trade Policy, have a proven track record, and comply with KYC requirements.
• Registered trusts should be established under the Indian Trust Act, of 1882, and have their trust deed permitting the proposed investment.
• Societies must be registered under the Societies Registration Act, of 1860, and have their Memorandum of Association and rules allowing the proposed investment.

5. Through an AD Category-I bank, applications should be forwarded to the Chief General Manager of the Reserve Bank of India’s Foreign Exchange Department and Overseas Investment Division. Before sending the application, together with their feedback and ideas, for consideration, the bank must make certain that the terms and criteria are met.

 

FAQs:

 

Q.) What documents are required by banks for making ODI?

1. Form FC as prescribed by RBI
2. Form A2 for trade outward remittance as prescribed by RBI
3. Net worth certificate issued by Chartered Accountant
4. Application for making ODI on the letterhead of the applicant (Format provided by the bank)
5. Board Resolution authorizing proposed overseas direct investment
6. Valuation certificate of the overseas party working by an Indian Chartered accountant or A-class investment banker
7. The latest Audited balance sheet of the Indian Entity
8. Memorandum of Association of Indian Entity (Partnership deed in case of partnership firm) and that of overseas Company confirming the object of establishment
9. PAN of the Indian entity
10. Share sale/purchase agreement (SPA)

Q.) Can proprietorship firms and unregistered partnership firms make ODI under an automatic route?

No, proprietorship and unregistered partnership firms cannot make ODI under automatic route but Proprietorship concerns, unregistered partnership firms, registered trusts, and societies engaged in manufacturing, education, or hospital sectors may make investments in a JV/WOS outside India with prior approval from the RBI.

Q.) What is the difference between a joint venture and a wholly owned subsidiary in the context of ODI?

“Joint Venture (JV)” signifies a foreign body constituted, documented, or incorporated in compliance with the legislation and rules of the host nation wherein the Indian Party invests directly. Whereas “Wholly Owned Subsidiary (WOS)” represents a foreign entity created, registered, or incorporated following the laws and regulations of the host nation, with the Indian Party owning its full capital. So the main difference between the both is that in a Joint venture Indian party do not own 100% shares but in WOS Indian party owns 100% share.

Q.) What does Net Worth Include with context to Overseas Direct Investment (ODI)?

For companies, net worth consists of paid-up capital and free reserves and for partnership firms, it includes Partner’s capital.

Q.) What is the maximum permitted amount for making ODI under the automatic route?

The maximum permitted amount for Overseas Direct Investment (ODI) under the automatic route is up to 400% of the net worth of the Indian entity subject to the maximum amount of USD 1 billion.

Q.) Can we invest in installments for ODI?

No, for ODI investment should be made in a single shot but if it is written in the share sale/purchase agreement that the investment can be made in two or three tranches, then it can be made in installments provided that all installments are made within 180 days of making the first installment.

Q.) What is the time limit for submission of proof/share certificate after making an ODI?

Indian investors must receive share certificates or any other valid documentary evidence of investment in the foreign entity as an eligible form of proof. The time limit for submitting this proof to the bank is within six months from the date of remittance.

Q.) What is the highest amount that a person may invest abroad?

According to the LRS’s maximum authorized limit, a resident individual may invest up to USD 250 000 in the equity shares and mandatory convertible preferred shares of a joint venture (JV) or wholly owned subsidiary (WOS) outside of India.

Q.) Is hedging permitted for overseas direct investment?

Yes, Indian entities are permitted to hedge the risk arising out of currency fluctuation through forwards and options contracts.

Q.) What are the prohibited sectors where ODI is not permitted under automatic route?

1. Real estate: Investments in real estate or the purchase of immovable property, except to carry out business operations or establish a legal presence abroad.
2. Banking: Investments in foreign entities that are engaged in banking or financial services, without meeting the specific regulatory requirements.
3. Sectors subject to international sanctions: Investments in countries or sectors that are subject to international sanctions or embargoes, as imposed by the United Nations, the Indian government, or other relevant authorities.
4. Sectors prohibited by Indian law: Investments in sectors that are explicitly prohibited by Indian law, such as gambling and betting, lottery businesses, chit funds, or Nidhi companies.

Q.) What is the time limit for submission of the Annual Performance Report (APR)?

Indian entities that have made an overseas direct investment must submit an Annual Performance Report (APR) to the RBI, through their Authorized Dealer (AD) bank. The APR provides details about the financial performance of the overseas entity and should be submitted within 6 months from the end of each financial year of the overseas entity.

Q.) Should the Indian entity repatriate the profits and dividends earned from their Overseas Direct Investment?

1. Profits and dividends must be repatriated to India within a reasonable time, as per RBI guidelines. The Indian entity should not delay repatriation without valid reasons, and any delay in repatriation should be reported to the RBI through the AD bank.
2. The profits and dividends can be reinvested in the overseas entity, subject to compliance with the ODI guidelines. However, the Indian entity should report such reinvestment to the RBI through their AD bank.
3. Repatriation of profits and dividends should follow the laws and regulations of the host country and applicable tax treaties between India and the host country.

For any query and plans related to ODI, you may contact IBRLive and obtain professional consultancy.