The Reserve Bank of India vide A.P (DIR) Series circular no. 12 dated 26 February 2021 allowed...
In current times, Indian investors are increasingly looking to expand their business, gain access to new markets, procure intellectual property, and undertake research and development. For this purpose, overseas direct investments have gathered considerable momentum. Still, it becomes challenging to navigate the Overseas Direct Investment regulatory regime from the investor’s perspective.
By making an investment in foreign company by Indian individual helps the country in promoting economic-co-operation with the host countries, transfer of technology and skill, branding of a country as an investor and also sharing of results of R&D. It also helps in the generation of employment or utilization of raw material that is available in India with regard to the host country.
In simple terms, Overseas Direct Investment means investments done by an Indian outside of India. It can be made by purchasing existing shares of a foreign entity either by market purchase or private placement or through a stock exchange, or via subscription to the Memorandum of a foreign entity signifying a long-term interest in the foreign entity (JV or WOS).
Investment in foreign company by Indian individual is regulated by the Foreign Exchange and Management Act, 1999, and various rules and regulations issued thereunder. Because of the complex and regulatory regime, it has become essential for investors to take proper guidance related to matters on their investment. This blog covers a few practical considerations that are appropriate from an investor’s perspective.
An Indian individual must first come under the definitions of Resident Individual under FEMA to make an investment in a foreign company.
The RBI or Reserve Bank of India has allowed the Resident Individual’s to make an investment in CCPS of the companies or its equity shares that is incorporated outside India. With regard to subject to certain stipulated conditions, the Resident individual’s can make an investment in Overseas Direct Investment.
Section 2(v) of FEMA, 1999, defines Resident Individual. ‘Person Resident in India’ means:
In simple terms, a ‘Person Resident in India’ includes persons of India except for those who are staying abroad either for work, business, or any other purpose and also foreign nationals who come and stay in India for employment, carrying out business or any other purpose.
Investment in foreign company by Indian individuals or resident individuals can be made in overseas portfolio investments without any limit in the listed offshore companies that have at least a 10% share in an Indian Company. The company must be listed in a recognized stock exchange in India as on 1st January of the investment year.
Indian individuals who can make an investment in a foreign company are as follows:
The eligible persons can invest abroad in Joint Ventures/ wholly-owned Subsidiaries.
The Reserve Bank of India has mentioned the guidelines in its Notification FEMA No. 10 dated 3rd MAY, 2000. It has been amended from time to time, and also it can be accessed at the Reserve Bank’s website fema.rbi.org.in.
Any clarification with respect to specific cases can be obtained from the Reserve Bank’s Central office in the address mentioned below:
Overseas Investment Division,
Exchange Control Department,
Reserve Bank of India,
For making an investment in foreign company by Indian individual the regulations are prescribed under FEMA, 1999. Typically investment made in foreign company by Indian individual is also known as Overseas Investment, it is segregated as follows;
Direct investment signifies a long-term interest in the foreign business. It takes the form of capital contribution or subscription to the Memorandum of an overseas business or through the purchase of shares of a foreign entity either by way of market purchase or by private placement or via stock exchange. This is done with an intention to control the management of the investee company. An Indian party can make overseas Direct Investment in any legal activity except the following:
Investment in foreign company by Indian individuals is sometimes made for financial gain and sometimes for speculation. There is no such intention for building long term investment or control over the management o0f a foreign company. This investment is practically very unpredictable. Unlike the Direct investment, there can be a quick withdrawal of portfolio investment.
There are two routes prescribed for making investment in foreign company by Indian individual:
Under the automatic route, no prior approval of the Reserve Bank of India is required. An individual is required to approach an AD Category –I Bank in Form ODI (online) along with all the required documents. The guideline for making an investment in foreign company by an Indian company is prescribed below:
Indian Party here includes Registered Partnership Firm, companies (a partner is also eligible to hold shares for and on behalf of the firm of JV/WOS. The funding must be entirely made by a Firm, and the law of the host country permits the same. RBI must notify a body created under the Act of Parliament or any entity.
Investment made in Pakistan is under the approval route.
A unique identification number (UIN) is generated automatically and instantaneously for the particular JV/WOS. This can be made only after the allotment of the UIN. Also, it must be reported in Form ODI within 30 days from the transaction.
Investment proposals that are not covered under the specified Automatic Route and are not prohibited under the Approval route require prior approval of the RBI. The Form ODI must be duly filled in with all the necessary documents as well as the pricing guidelines in the same way as mentioned above. All the trusts and registered societies engaged in a specific sector are allowed to invest overseas in the same sector with approval from RBI.
An Indian party must follow the below-listed obligations after making an investment in foreign company by Indian individual:
At Enterslice, you will find a group of experts who can guide you through the whole process. Also, we can help you in doing the auditing work and even completion of valuation work as we have duly certified CA to help you through this challenging work.
The ODI Regulations fails to explain the portfolio investment. In general terms, a portfolio investment is widely understood as a financial or treasury instrument; also, it is not included in the management rights. Subject to this, it is also arguable that an Indian party can invest overseas without being subjected to the applicable ODI provisions. It is also unclear whether the RBI will willingly accept this interpretation.
Also, Read: Types of Foreign Investment in India.