Overseas Direct Investment (ODI) in Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is a way of promoting business globally by Indian entrepreneurs. It’s a medium of connecting two countries through business co-operation. Overseas Direct Investment (ODI) is done by Indian Parties and Resident Individuals through Joint Venture (JV) and Wholly Owned Subsidiary (WOS).
What is Overseas Direct Investment (ODI)?
Overseas Direct Investment is done with the view to diversify the business outside country. It enables businesses to take opportunity given by the overseas market by utilizing the full capacity. There are numerous benefits of overseas investments.
Overseas investments involve transfer of significant benefits such as:
Technology & Skill
Utilization of Raw Material
It does not only provide benefit to businesses but also provide benefit to country as it promotes economic co-operation with the host countries and much more. In simplified words, Overseas Direct Investment is an investment made by Indians outside India. Investment can be made either by way of subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares.
What are the benefits of Overseas Direct Investment (ODI)?
Here are the following benefits
of Overseas Direct Investment (ODI):
Indian Companies get
better access of technological know-how
Global Expansion of Business
Extensive Market Access
Global Customer Base
Overseas Direct Investment (ODI) Framework in India
ODI is governed by the following in India:
Section 6(3)(a) of
Foreign Exchange Management Act (FEMA) 1999 read with FEM (Permissible capital
Account Transactions) Regulations, 2000
FEM (Transfer or Issue
of any Foreign Security) Regulations, 2000
A.P. (DIR Series)
Circulars issued by RBI
Guidelines released by
RBI on Overseas Direct Investment
Scheme & FAQ (Applicable for resident Individuals)
Routes for ODI
Eligibility for Overseas Direct Investment (ODI)
An Indian Party is eligible to make Overseas Direct Investment (ODI) into a Joint Venture or Wholly Owned Subsidiary.
An Indian Party covers the following:
A foreign entity created by the
Indian party where foreign promoters are holding stake with Indian Party is
termed as Joint Venture.
Wholly Owned Subsidiary
In wholly owned subsidiary company, entire capital is owned by the Indian Party.
Overseas Direct Investment (ODI) under Automatic Route
In overseas joint venture / wholly owned subsidiary company, financial commitment shall not exceed 400% of the net worth as per the last audited financial statement.
If the financial commitment exceeds USD 1 billion in financial year then prior approval of RBI is required.
The wholly owned subsidiary company should engage in bonafide business activity.
Indian Party should not be on the Reserve Bank’s exporters’ caution list of defaulters or under investigation by the Directorate of Enforcement or any other regulatory authority.
Routing of all the transactions by the Indian Party related to the investment in a foreign entity through only one branch of an authorized dealer.
An application shall be made to RBI after obtaining an NOC from the existing authorized dealer (AD) for switching over to another AD.
ODI Route in Following Countries:
Pakistan – Approval Route
Nepal – Only in Indian Rupees
Bhutan – Only in Indian Rupees and in freely convertible
Overseas Direct Investment (ODI) under Approval Route
In energy and natural resources sector exceeding the
In unincorporated entities in the oil sector
Investment made by proprietorship concerns and unregistered
partnership firms which are fulfilling the eligibility criteria
Investment made by registered trusts / societies engaged in
the manufacturing / educational /hospital sector in the same sector in a JV /
WOS outside India which are fulfilling the eligibility criteria.
Corporate guarantee made by the Indian Party to Second and succeeding
level of immediate subsidiary;
All other forms of guarantee which is offered by the Indian
Party to its first and subsequent level of SDS;
Balance sheet restructuring of joint venture / wholly owned
subsidiary involving write-off of capital and receivables fulfilling
Export proceeds capitalization
Without equity contribution in Joint Ventures/ Wholly Owned Subsidiary, undertaking financial commitment
Routes for Overseas Direct Investment (ODI)
Prior approval is not required from the RBI.
Prior approval of the RBI is required in prescribed Form along with the specified documents.
An Indian Party is required to approach AD Category – 1 bank.
Not meeting the prescribed conditions for automatic route.
ODI within the prescribed limit of 400% of the net worth of Indian Party.
Overseas investments by the below mentioned fulfilling the eligibility criteria: – Proprietorship Concerns – Unregistered Partnership Firms – Registered Trusts/ Societies
ODI made by the Indian Party engaged in Financial sector subject to the conditions prescribed.
Indian Party undertaking financial commitment, without contributing in Joint Venture / Wholly Owned Subsidiary
ODI in oil sector subject to prescribed conditions.
Components of Overseas Direct Investment (ODI)
Overseas Direct Investment (ODI) in Financial Sector
Trading in overseas commodities
exchanges and for trading in overseas exchanges setting up joint ventures /
wholly owned subsidiary will be considered as financial activity.
Pre – Conditions
Proper registration with the regulatory authority in India.
Net profits earned from the financial services during the preceding 3 financial years.
For making such investment, concerned regulator’s approval in India and abroad.
Compliance with the capital adequacy norms prescribed by the regulatory authority in India.
What are the Procedural Compliances?
Form ODI with annexure to
be submitted to Authorized Dealer along with Form A2.
Certified Copy of the Board Resolution, Statutory Auditors Certificate and Valuation
Report as per the valuation norms (in case of acquisition of an existing
Form ODI is required to be submitted individually by all the investing entities in case where the investment is being made jointly by more than one Indian Party or Resident Individuals.
An Unique Identification Number (UIN) is allotted by the RBI in respect of Joint Venture / Wholly Owned Subsidiary.
Only after allotment of the UIN subsequent investments in the same foreign entity can be made.
The UIN allotment does not constitute RBI approval.
Contents of the Form ODI
Part 1 – Details of the Indian
Party, Transaction Details, Capital Structure, Statutory Auditor Certificate,
Part 2 – Annual Performance
Part 3 – Disinvestment Report
What are the Post ODI Compliance?
The Indian Party shall receive share certificate and other documentary evidence and submit it to the AD within the period of 6 months.
All dues receivable from the overseas JV / WOS repatriate to India such as dividend, royalty, technical fees etc.
In respect of the each JV/ WOS, Annual performance Report (APR) will be filed by the 31st December every year.
Reporting of the decision taken by the JV / WOS in respect of the diversification of the activities / alteration in share holding within 30 days of the approval.
Repatriate the sale proceeds immediately or not later than 90 days from the date shares /securities have been sold on disinvestment.
Filing of the Foreign Liabilities and Assets (FLA) return by 15 July every year with the RBI even if the APR has been filed.
With ODI, RBI has given opportunity to expand business activities in other countries as well subject to the prescribed guidelines. Indian Party is permitted to invest in other countries through Joint Venture / Wholly Owned Subsidiary. Nowadays it is a foremost step to enter into a foreign market. With overseas investment, Indian entrepreneurs can expand their business globally. It involves transfer of technology, research & development, promotion of brand image and utilization of resources.