FEMA Foreign Investment

Basic Concepts of Overseas Direct Investment (ODI)

Overseas Direct Investment in Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is a way of promoting business globally for Indian entrepreneurs. It is a medium of connecting two countries through business co-operation. Overseas Direct Investment is made with the view to diversify the business outside the country. It enables businesses to take the opportunity given by the overseas market by utilising the full capacity. There are numerous benefits of overseas investments.

Overseas investment involves the transfer of major benefits such as:

• Technology & Skill
• Market Access
• Sharing R&D
• Brand Image
• Employment Generation
• Utilization of Raw Material

It does not only provide benefits to businesses but also benefits the country as it promotes economic cooperation with the host countries with many other significant benefits. 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 (MOA) of a foreign entity or through the purchase of existing shares of a foreign business/entity.

What is Overseas Direct Investment (ODI)?

An Overseas Direct Investment or ODI refers to overseas investments by entities in the following ways:

• By way of contribution to their capital
• Subscription to the MOA or Memorandum of Association of a foreign entity
• Purchase of existing shares either by market purchase or stock exchange or through private placement, but it does not include portfolio investment.
• General permission is granted to persons (individual) resident in India for the purchase/acquisition of securities as under:
  1. From the funds held in the RFC account.
  2. On Existing holding of foreign currency shares as bonus shares.
  3. In case the person is not a permanent resident in India, from foreign currency sources outside India.
• General permission is also required to sell the shares so acquired or purchased.
• As per the Liberalised Remittance Scheme (LRS), an Indian resident can remit up to the limit prescr5ibes by the Reserve Bank of India (RBI) for permitted capital and current account transactions, including the purchase of securities and also setting up of acquisition of Joint Ventures or wholly-owned subsidiary.

What are the benefits of Overseas Direct Investment (ODI)?

Here are the following benefits of Overseas Direct Investment (ODI):

• Indian Companies get better access to 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
• AP (DIR Series) Circulars issued by RBI
• Guidelines released by RBI on Overseas Direct Investment
• Liberalized Remittance Scheme & FAQ (Applicable for resident Individuals)

Modes of Overseas Direct Investment

There are two types of modes in ODI. They are:

• Automatic Route and
• Approval Route

Automatic Route

• In this mode, an Indian Party does not need to seek any prior approval from the Reserve Bank of India(RBI) for making any overseas direct investments in a JV or WOS abroad.
• However, an Indian Party needs to approach an Authorized Dealer (AD) Category-1 Bank with an application in Form ODI Part-I along with the prescribed documents/enclosures for making such investments, and the AD Bank should report the relevant Form ODI in the online ODI application.
• The applicant must obtain a UIN while executing the remittance and then intimate to the remitter, which shall be used by him in all future communications with the RBI.
• An Indian Party under the Automatic route can make overseas direct investment in the Compulsorily Convertible Debentures and  equity shares of WOS outside India without the prior approval of the RBI subject to some restrictions explained below:
  1. The WOS abroad must be engaged in a bonafide business activity.
  2. The Indian Party’s total financial commitment in all the WOS abroad shall not exceed 400% of the net worth of the Indian Party as on the date of the last audited balance sheet. However, if the financial commitment exceeds USD $ 1 billion in a financial year requires prior approval from RBI.
  3. The above limit is not applicable to direct investment in any foreign security out of the proceeds of its international offering of shares through the mechanism of GDR or ADR from the balances held in the EEFC account of an Indian Party.
  4. The name of the Indian Party must not be on the Reserve Bank’s Exporter’s caution list or the defaulter’s list to the banking system circulated by the RBI/ Credit Information Bureau India Ltd. (CIBIL).
  5. An Indian Party can extend a guarantee or loan on behalf of the JV or WOS abroad, provided that the Indian Party has made the investment via the equity capital of the JV or WOS.
  6. The valuation of shares for the purpose of making investments outside India shall be performed by a Chartered Accountant (CA) or Certified Public Accountant. In case the amount crosses USD 5 million, then the valuation of shares shall be done by a Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker with any appropriate regulatory authority in the host country.
  7. The Indian Party routes all the transactions only through one branch of Authorised Dealer (AD).

Approval Route

In case the conditions are not fulfilled in the Automatic route, then the Indian Party need to seek prior approval of the RBI before making any investment. Similar to the automatic route, the applicant should approach their designated Authorized Dealer with Form ODI along with all the prescribed documents or enclosures. The application shall then be submitted to RBI after due scrutiny with the AD bank and also with the specific recommendations of the designated AD Bank attached with the supporting documents.

The AD, before forwarding the proposal, submit Form ODI in the online application under the approval route, after which a UI will be provided by RBI.

Before approving, the RBI shall look into the following factors:

• The capability of JV or WOS outside India prima facie.
• Its contribution to external trade and also other benefits will accrue to India by way of such investment.
• The financial position and business track record of the Indian party and also the foreign entity.
• Indian Party’s experience in the same or related line of activity in the JV or WOS outside India.

The basic difference is cited in the table below :

Automatic Route	Approval Route
Prior approval is not required from the RBI.	Not meeting the prescribed conditions for the automatic route.
An Indian Party is required to approach AD Category – 1 bank.	Overseas investments by the below-mentioned fulfilling the eligibility criteria: – Proprietorship Concerns – Unregistered Partnership Firms – Registered Trusts/ Societies
ODI within the prescribed limit of 400% of the net worth of Indian Party.	ODI in the oil sector is subject to prescribed conditions.
ODI made by the Indian Party engaged in the Financial sector subject to the conditions prescribed.	Indian Party undertaking financial commitment, without contributing in Joint Venture / Wholly Owned Subsidiary
ODI in the oil sector subject to prescribed conditions.

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.

• Indian Party

An Indian Party covers the following:

• Joint Venture

A foreign entity created by the Indian party where foreign promoters hold a stake with Indian Party is termed a Joint Venture.

• Wholly Owned Subsidiary

In a wholly-owned subsidiary company, the entire capital is owned by the Indian Party.

Components of Overseas Direct Investment (ODI)

What is the Manner of Funding in ODI?

Investment in an ODI( JV /WOS) can receive funds from one or more of the following sources:

1. From an AD Bank in India drawl of foreign exchange.
2. Capitalization of the exports.
3. After receiving approval from FIBP and also valuation of shares is done by a Category and Merchant Banker swap of shares.
4. Proceeds of Foreign Currency Convertible Bonds/ External Commercial Borrowings (ECBs).
5. From the balance held in Indian Party’s EEFC account.
6. Funds rose through ADRs/ GDR issues from the proceeds of foreign currency funds.
7. In accordance with the schemes for the issue of Foreign Currency Convertible Bonds and Ordinary shares through (Depository Receipt Mechanism) scheme, 1993.

What are the Obligations of Indian Entities as well as the Individuals Making ODI?

The reporting compliances and also the obligations of the Indian entities are as follows:

One Time

The Indian Company that intends to make any direct investment by way of the automatic route must submit the Form ODI with the designated bank along with the documents mentioned below:

• Certified Copy of the Board Resolution.
• Auditor’s Certificate
• Valuation report

Recurring

• Submit the annual performance report of the overseas entity to the RBI by way of AD Bank.
• Submitting annual returns on foreign assets and foreign liabilities.
• Report on all the details of the decisions taken by way of JV or WOS regarding diversification of its activities or setting up of step-down subsidiaries or alteration in the shareholding pattern within 30 days of the alteration.

Event Wise

1. Submit the share certificates or any other documentary evidence of investment made in the foreign JV/WOS as evidence of investment to the designated AD within six months.
2. Return all the dues to India, viz. royalty, dividends, etc., within 60 days of failing to pay the due.
3. In the case of sale proceeds. Disinvestment of shares or securities shall be repatriated to India immediately on receipt thereof, and in any case not later than 90 days from the original date of sale of securities/ shares and also documentary evidence to this effect shall be submitted to the RBI via designated AD.

Overseas Direct Investments by Resident Individuals

1. A resident individual with single or in association with another resident or with an Indian entity) may make ODI in the equity shares and CCPS of a JV or WOS outside India under the Liberalised Remittance Scheme.
2. As per this scheme, all the resident individuals, including the minors, are permitted to freely remit up to USD 125000 per financial year.
3. The investors can retain and also re-invest the income earned on the investments made under the scheme. The residents do not need to repatriate the funds or generate income out of the investments made under the scheme.
4. As per the RBI, resident individuals in India are permitted to form a company outside India under the LRS within the limits prescribed thereunder. However, the reporting mechanisms also make it applicable to the resident individuals.

Overseas Direct Investment (ODI) in the Financial Sector

Trading in overseas commodities exchanges and trading in overseas exchanges setting up joint ventures / wholly-owned subsidiaries will be considered financial activity.

Pre – Conditions

• Proper registration with the regulatory authority in India.
• Net profits earned from the financial services during the preceding three financial years.
• For making such an investment, the 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.  

• Form ODI is required to be submitted individually by all the investing entities in cases where the investment is being made jointly by more than one Indian Party or Resident Individual.
• 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, Declaration.

Part 2 – Annual Performance Report (APR)

Part 3 – Disinvestment Report

What are the Post ODI Compliance?

• The Indian Party shall receive a share certificate and other documentary evidence and submit it to the AD within a period of 6 months.
• All dues receivable from the overseas JV / WOS repatriated to India, such as dividends, royalty, technical fees, etc.
• In respect of each JV/ WOS, the Annual Performance Report (APR) will be filed by the 31^st of December every year.
• Reporting of the decision taken by the JV / WOS in respect of the diversification of the activities/alteration in shareholding 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) returns by 15 July every year with the RBI, even if the APR has been filed.

Takeaway

With ODI, RBI has given the opportunity to expand business activities in other countries as well as subject to the prescribed guidelines. Indian Party is permitted to invest in other countries through Joint Venture / Wholly Owned Subsidiary. Nowadays, it is the foremost step to enter into a foreign market. With overseas investment, Indian entrepreneurs can expand their business globally. It involves the transfer of technology, research & development, promotion of brand image, and utilization of resources.