Overseas Direct Investment (ODI) Reporting and Compliance

Swetha Dhinesh

15 May, 2023

Overseas Direct Investment (ODI) is a term that is frequently used in the age of globalisation. In recent years, it has been identified that the trend of investing in foreign entities is growing annually. Numerous residents and Indian businesses are investing in or obtaining stakes in international enterprises.

Overseas Direct Investment refers to a sort of investment made by Indian corporations with international entities outside of Indian Territory. We can engage in ODI in several ways, such as investing in foreign entities or adding to their capital. Aside from market purchases and stock exchange assistance, we may also buy shares of international companies. 

The FEM (Overseas Investment) Rules, 2022, have replaced the FEM (Transfer or Issue of any Foreign Security) Regulations, 2004, and the FEM (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015. 

Overseas Direct Investment 

Overseas Direct Investment is the term for investments made outside of India that are made through either the Automatic Route or the Approval Route and involve making a capital contribution, subscribing to a foreign entity’s memorandum, or purchasing existing shares of a foreign entity through the market purchase, a private placement, or a stock exchange. These investments signify a long-term interest in the foreign entity (JV or WOS).

Foreign Entity

The terms “joint venture” and “wholly owned subsidiary” have been replaced by the word “foreign entity”, which refers to a limited liability entity created, registered, or incorporated outside of India, including IFSC in India. Foreign entities with limited liability are a brand-new requirement, even though the registration and incorporation criteria are the same as those for JV and WOS.

Compliances for Overseas Direct Investment in India

There are two categories of compliance for overseas direct investment in India:

Pre-compliance: Within 30 days of making the investment, the Indian party is required to submit the ODI form as part of the pre-compliance.

Post-Investment Compliance: In accordance with these compliance requirements, the Indian Party shall:

• Within six months of the remittance date or the date to such person became due, whichever is later, a resident of India who acquires equity capital in a foreign entity that is counted as ODI shall submit to the Authorised Dealer (AD) bank share certificates or any other relevant documents.
•  Before sending an outward remittance or purchasing equity in a foreign entity, whichever occurs first, a person resident in India must obtain a Unique Identification Number (UIN) from the Reserve Bank for the foreign entity in which the Overseas Director Investment is intended to be made.
• A resident of India who submits an ODI must identify an AD bank and direct all transactions involving a specific UIN through that AD.
• With the exception that all transactions involving that UIN must go via the AD bank designated for that UIN if more than one Indian resident makes a financial commitment to the same overseas firm.
• A resident of India who holds an ODI in a foreign entity must, as required by the host country’s or host jurisdiction’s laws, realise and repatriate to India all dues owed by the foreign entity with respect to the investment in the foreign entity, the amount of consideration received for the transfer or disinvestment of the ODI, and the net realisable asset value on account of the liquidation of the foreign entity.
• A resident of India who qualifies for ODI may send money towards an earnest money deposit or obtain a bid bond guarantee from an Authorised Dealer bank to participate in a tender or bidding process to purchase a foreign entity. 
• Annual Performance Report (APR) must be submitted under Part II of Form ODI for every joint venture and wholly owned subsidiary made outside of India or earned by Indian Parties through December 31 of each year.  
• Within a month, provide details of any decisions made by a joint venture or a wholly-owned subsidiary regarding diversification of their business operations or a change in their shareholding structure.
• Even after an Annual Performance Report has been filed, the Indian Party is still required to register foreign liabilities and assets with the RBI.

The Annual Performance Report must always be accompanied by the following:

• Copies of FIRCs supporting incoming payments for dividends, royalties, etc.
• The overseas venture’s financial statements have been audited.
• A chartered accountant’s certification attesting to the realisation of export revenues.
• A summary of how the JV/WOS operated over the preceding year, including any financial ups and down, causes for underperformance, etc. If the promoter firm is unable to submit the APRs by the deadline, a request for an extension should be made to the RBI on the due date with justification.

Reporting Norms

The government has broadened the late submission fee (LSF) concept to include overseas investments following the successful deployment of LSF for foreign direct investment applications. This can be used to regularise reporting delays without going through the compounding procedure and applies to any form or return filing delay under the OI Rules or Regulations. 

Before, the legislation only allowed for adjudication of such reporting errors, or the defaulting party had to go through a laborious compounding procedure. By paying the necessary LSF within three years of the reporting due date, such filing lapses can now be rectified without having to go through the compounding process.

Forms that must be filed have undergone revisions, while other requirements, such as those for compliance, have been relaxed. While the amendments encourage easy reporting compliances, the new rules require thorough compliance monitoring.

Restriction on further financial commitment or transfer

A resident of India who has made a financial commitment to a foreign entity in accordance with the Act or regulations or rules made thereunder is not permitted to transfer that investment or make any additional direct or indirect financial commitments to a such foreign entity until any reporting delays have been resolved.

Restriction on Investment

Without the specific permission of the Reserve Bank of India^[1], it is against the rules for an Indian resident to invest in a foreign company that engages in the following:

1. Real estate activity
2. Gambling of any kind
3. Trading in financial products connected to the Indian rupee.

Conclusion

Every day, the globalisation phenomenon grows enormously. To avoid legal problems, the Indian parties must keep in mind the Overseas Direct Investment requirements in India. Before making investments abroad, there are a few crucial points to remember. Before acting, Indian parties should take the time to assess the effectiveness and performance of foreign entities.

The RBI has made the long-awaited adjustment to the regulations governing these structures, enabling Indian companies to grow their footprint abroad and bring in downstream capital.

Read our Article: What are the types of Foreign Direct Investment?