Key Differences between Inbound and Outbound Investment

Varun Hariharan

06 Nov, 2020

Any investment which comes into India is known as Inbound Investment, and Outbound Investment is an investment which goes outside India.  Compliance has to be met by an entity which is carrying out any inbound and outbound investment under FEMA. This article is going to analyse the key differences between inbound and outbound investment.

What is an inbound investment?

Any form of investment which injects capital in India is considered as an inbound investment. For example, a foreign investor wants to consider an investment opportunity in a company. If the foreign company subscribes to the shares offered by the Indian company, then such a form of investment is known as an inbound investment.  There are different forms of inbound investment in India. When a company considers inbound and outbound investment, then compliance has to be maintained under respective foreign exchange laws.

What is an outbound investment?

An outbound investment can be understood as any form of investment which is carried out by an individual or entity by investing in the shares of a wholly-owned subsidiary or a joint venture which is established outside India. For example, an outbound investment can be any form of investment by a company or an individual in the shares of a company. A classic example of an outbound investment is under the Liberalised Remittance Scheme (LRS). This scheme would apply to only individuals who can carry out any form of outward remittance outside India. A maximum limit of USD 2, 50,000 can be transferred outside India under the scheme.  Hence both inbound and outbound investment has respective rules applicable to their operation.

Regulation for Inbound and Outbound Investment

The primary regulatory authority for both these investment is the Reserve Bank of India (RBI). Through this central bank, different investors can carry out activities and transactions which involve inbound investment and outbound investment.

The government of India (GOI) brought out the Foreign Exchange Management Act, 1999 (FEMA) with a view to regulate foreign exchange transactions in India. Due to this act, the number of foreign exchange reserves in India increased.

Apart from this, the RBI through section 11 of the FEMA authorised specific institutions called authorised banks or authorised dealers to carry out transactions on behalf of companies that want to carry out the inbound and outbound investment.

There are specific modes to apply for making both forms of investment. An applicant would have to apply with the respective authority.

Modes of making Inbound and Outbound Investment

There are specific modes of making these forms of investment.

The following would be considered when making an inbound and outbound investment:

• Inbound investment: These investments can be made by a foreign company in a domestic Indian company. There are different forms of inbound investment which can be made by a foreign company.

The following are the types of inbound investment which can be made by a foreign investor:

• Foreign Direct Investment (FDI)
• Foreign Investment
• Foreign Portfolio Investment (FPI)

The above methods are used to make inbound investments in India. However, the government has regulated specific sectors and the amount of investment in each sector.  There are different routes for making such an investment.

The routes for investing are the following:

1. Automatic Route- Under the automatic route, there is no requirement for any form of approval from the government. A foreign investor can invest under this route without any approval.
2. Approval Route- The approval route is also called the government route. Under this route, a foreign investor requires specific consent from the government authority to make an inbound investment.

• Outbound Investment- Outbound investment also requires a specific procedure to be followed. Similar routes are followed for making outbound investments, i.e. automatic route and approval route.

However, an outbound investment can be made in the form of overseas direct investment (ODI). An ODI is any form of direct investment in the shares or capital instruments of a foreign-owned wholly-owned subsidiary or any other form of entity.

Apart from this, individuals would also be allowed to make an outbound investment. An outbound investment through an individual can be made under the Liberalised Remittance Scheme^[1] (LRS). This scheme is utilised for investing in maintenance and other forms of foreign expenditure outside India.

Outbound investments through the ODI route can only be made by resident corporate and partnership firms in wholly-owned subsidiaries and joint ventures outside India. Individuals can make an outbound investment through the LRS scheme.

Conclusion

Read our article:FEMA/ RBI Compliances Checklist: Foreign Direct Investment