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Guidelines on Overseas Direct Investment Approval from RBI

Ashish M. Shaji

| Updated: May 11, 2020 | Category: Foreign Investment

Guidelines on Overseas Direct Investment

An Overseas Direct Investment relates with respect to the investments made in the Joint Ventures and Wholly Owned Subsidiaries through subscription to the memorandum of a foreign entity or the purchase of existing shares of a foreign entity by way of market purchase or private placement or by stock exchange. The Overseas Investment in Joint Ventures or wholly-owned subsidiaries has been recognized as an important avenue for the promotion of Indian entrepreneur’s global reach.

Guidelines Relating to Overseas Direct Investments available and source of clarifications with respect to the guidelines on overseas investment

With a view to regulate the Overseas Direct Investment (ODI), the RBI had notified vide Notification No. FEMA 120/RB- 2004 dated July 7, 2004, amended from time to time. A Master direction on direct investments by the residents in Joint Venture or Wholly owned subsidiary abroad has been issued. These master directions consolidate instructions on rules and regulations set-up by the Reserve Bank under Acts, including foreign exchange transactions and banking issues.

Meaning of Direct Investment outside India

The term Direct Investment outside India means investment under the automatic route or the approval route through contribution to the capital or subscription to the Memorandum of a foreign entity or through purchase of existing shares of such entity by market purchase, private placement or through the stock exchange, thus signifying a long term interest in the foreign entity.

General permission for Purchase or Acquisition of Securities abroad

A general permission has been provided to the person (individual) residing in India for purchasing or acquisition of securities as provided under:

  • Out of funds held in the RFC (Resident Foreign Currency) account
  • Holding bonus issue with respect to the investment made in the foreign currency shares
  • Investment made by a person who is not a permanent resident in India with their foreign currency resources outside India.

A general permission to sell the shares or acquired is also available. An Indian resident can remit till the prescribed limit by the Reserve Bank from time to time per financial year under the Liberalised Remittance Scheme for permitted current and capital account transactions including security purchase and setting up or acquisition of Joint Venture or Wholly Owned Subsidiaries overseas with effect from August 5, 2013.

Prohibited activities for Overseas Direct Investment

An Indian party can make ODI in any bonafide activity. Real estates and banking businesses are the prohibited sectors for making Overseas Direct Investment (ODI). Real estate business includes buying and selling of real estate or trading in (TDRs) Transferable Development Rights, but it does not include development of townships, construction of residential or commercial premises, roads or bridges. However, it may be noted that the Indian Banks functioning in India can set up Joint Ventures or wholly-owned subsidiaries abroad provided that they obtain clearance under the Banking Regulation Act, 1949.

An overseas Joint Ventures or Wholly Owned Subsidiary having direct or indirect equity participation by an Indian party will not offer financial products linked to Indian rupee without the approval of the Reserve Bank.

Meaning of Joint Ventures and Wholly Owned Subsidiaries

 Joint Venture/Wholly Owned Subsidiary means a foreign entity that is formed, registered or incorporated according to the laws and regulations of the host country in which the Indian part or the resident Indian makes direct investment.

A foreign entity is known as the Joint Venture of the Indian party or the resident Indian when there are other foreign promoters holding the stake with the Indian party. When it comes to Wholly Owned Subsidiary, entire capital is held by one or more than one Indian party or resident Indian.

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Basic Concepts of Overseas Direct Investment

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Overseas Direct Investment under Automatic route and Approval route

Under the Automatic Route, an Indian party is eligible to make ODI. An Indian party doesn’t require any prior approval, under the automatic route, from the Reserve Bank for making Overseas Direct Investment in a Joint Venture or Wholly Owned Subsidiary abroad. The Indian party is required to approach an Authorised dealer category –I bank with an application in Form ODI and the required documents for effecting the remittances towards such investments. It must be noted that prior approval is needed from the concerned regulatory authority both in India and abroad, in case of investment in the financial service sector. ODI under Approval route means that prior approval is required from the RBI before making any investment.

Form ODI can be found as an annex to the Master Direction titled Master Direction on Reporting under Foreign Exchange Management Act.

Procedure of forwarding the proposal for making Overseas Direct Investment under Approval Route

The applicant is required to approach their designated authorised dealer along with the proposal, which shall be submitted to the Reserve Bank once scrutiny is done and with specific recommendations of the designated Authorised Dealer bank with supporting documents to the prescribed address.

The designated authorised dealer must submit the Form ODI in the online ODI application under the approval route before forwarding the proposal, and the transaction number generated by the application must also be mentioned in the letter.

In case the proposal is approved, the authorised dealer bank is required to effect the remittance under advice to the Reserve Bank in order to allot UIN.

The approval from the Reserve Bank requires following documents to be submitted along with Section D and Section E of Form ODI – Part I by the designated Authorised Dealer-

  • A letter from the designated Authorised Dealer of the IP in a sealed cover mentioning the bank details of the Indian entity, the transaction number, details of the overseas entity, background of the proposal, details of the transaction, reason behind seeking such approval, observations of the designated authorised dealer bank and the recommendations of the designated authorised dealer bank.
  • A letter from the IP to the designated authorised dealer bank.
  • Board resolution for the proposed transaction.
  • Diagrammatic representation of the organisational structure specifying all the subsidiaries of the Indian Party horizontally and vertically with their stake and status.
  • Incorporation certificate and the valuation certificate for the overseas entity, if applicable.
  • Other necessary documents properly indexed and flagged.

Other Overseas Direct Investment transactions that require RBI approval

The proposals which require prior approvals are mentioned below-

  1. Overseas Investments in the energy and natural resources sector going beyond the prescribed limit of the net worth of the Indian companies on the date of the last audited balance sheet.
  2. Investments in Overseas Unincorporated entities in the sector of oil by resident corporate going beyond the prescribed limit of their net worth on the date of the last audited balance sheet but it must be approved by the competent authority and should be duly supported by a certified copy of the board resolution that approves such an investment. It is essential to know that some (Navaratna Public sector Undertakings, ONGC Videsh Ltd. And Oil India Ltd.) are allowed to invest in overseas Unincorporated entities or incorporated entities in the oil sector that are duly approved by the Government of India without any limits under the automatic route.
  3. Overseas investments by unregistered partnership firms and proprietorship concerns satisfying certain eligibility criteria.
  4. Investments made by Registered Trusts or societies engaged in the manufacturing/educational/hospital sector in the same sector in a Joint Ventures or wholly-owned subsidiaries outside India.
  5. Corporate guarantee by the IP to the second and subsequent level of Step Down Subsidiary.
  6. All other forms of guarantee that is offered by the IP to its first and subsequent level of Step Down Subsidiary.
  7. Restructuring of the balance sheet of the Joint Ventures or wholly-owned subsidiaries involving write off of capital and receivables in the book of listed or unlisted Indian company satisfying the eligibility criteria.
  8. Capitalisation of export proceeds, which remains unrealised beyond the prescribed period of realisation will need the prior approval of the Reserve Bank.
  9. And proposals from the Indian Party (IP) for undertaking financial commitment without equity distribution in Joint Ventures or wholly-owned subsidiaries can be considered by the Reserve Bank under the approval route based upon the business requirement of the IP and the legal requirement of the host country where Joint Ventures or Wholly Owned Subsidiary is located.

Overseas Direct Investment under Automatic Route: Limits and Requirements

The criteria followed for Overseas Direct Investment under automatic route is mentioned below-

  • The IP can invest up to the prescribed limit of its net worth as per the last audited balance sheet in Joint Ventures or wholly-owned subsidiary for any bonafide activity in accordance with the law of the host country.
  • The Indian party should not be on the exporter’s caution list of the Reserve Bank or should not be in the list of defaulters to the banking system published or circulated by the CIBIL/ RBI or any other credit information company approved by the Reserve Bank or under the investigation by the DoE (Directorate of Enforcement) or any investigative agency or regulatory authority.
  • All transactions related to the Joint Ventures or wholly-owned subsidiary should be routed through one branch of an Authorised dealer bank to be designated by the Indian party.

UIN allotment by the Reserve Bank for direct investments under the Automatic Route

The UIN allotment does not constitute an approval from the Reserve Bank. The issuance of UIN just signifies taking on record the investment in order to maintain the database. The Authorised Dealer bank or the Indian party must comply with the provisions of FEMA regulations. The confirmation of allotment of UIN is provided to the authorised dealer bank or to the Indian party in the form of an auto-generated e-mail, providing details of UIN allotted to the JV/WOS under the automatic route. The Reserve Bank does not issue any separate letter for the same.

Sources for funding Overseas Direct Investment

The funding for investments can be made from any of the following sources:

  1. Drawal of foreign exchange from an Authorised Dealer bank,
  2. Swap of shares with respect to the valuation made according to the FEMA regulations,
  3. Capitalisation of exports, other dues and entitlements,
  4. Proceeds from external borrowings or Foreign Currency Convertible Bonds,
  5. Exchange of ADRs/GDRs issued according to the Scheme for issue of Foreign Currency Convertible Bonds and ordinary shares and the guidelines issued by the Government of India in the matter,
  6. Balances held in the account of Exchange Earners Foreign Currency of the Indian Party maintained with the Authorised dealer,
  7. Proceeds of foreign currency funds raised through the issuance of ADR/GDR.

General compliances to be known under Approval route-

  1. An application shall be made for obtaining the permission under the approval route. It can be made by submitting Form Overseas Direct Investment by the Authorised dealer category I bank.
  2. After the approval from the competent authority, any change in the activities or the shareholding pattern should be reported to the Reserve Bank within 30 days of such approval through the Authorised dealer category I bank. It also is to be included in the APR part II of form ODI that should be forwarded to the Authorised dealer category I bank.
  3. An Indian party making the investment abroad shall-
    • Receive any share certificate or any other document that satisfies the RBI.
    • Repatriate to India the receivable dues from the foreign entity.
    • Submit the Annual Performance Report (APR) to the Reserve Bank.
  4. Indian entity making disinvestment must submit the details of such disinvestment within 30 days from such disinvestment.

Conclusion

The RBI in a set of FAQs released by it last year stated that no Indian Company could acquire stake in an offshore company that has investments in an Indian entity. It will still apply if an Indian company buys an insignificant stake in an overseas company that either holds or picks a minority interest in some other Indian company. The rule may impact genuine Overseas Direct Investment though it’s aimed at minimizing round-tripping of funds and to curb the inflow of cheaper debt raised in the form of FDI.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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