Overseas Direct Investments

Meaning

It means investment outside India by entities by way of contribution to capital or subscription to Memorandum of Association of a foreign entity or purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange but does not include portfolio investment.

Eligible Entities

1. A company incorporated in India; or
2. A body created under an Act of Parliament; or
3. Partnership firm registered under the Indian Partnership Act, 1932;
4. A Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008.
5. Any other entity in India as may be notified by the Reserve Bank.
6. Resident Individual upto USD 2,50,000 under LRS Scheme

When more than one such company, body or entity makes investment in the foreign JV / WOS, such combination will also form an “Indian Party”. HUFs, AOPs, etc. are not allowed to invest abroad. Proprietary concern and Unregistered Partnership firm can invest abroad only after obtaining prior approval from RBI.

A Resident individual (single or in association with another resident individual or with an ‘Indian Party’), who satisfies the criteria as prescribed, can invest in the equity shares and compulsorily convertible preference shares of a JV or WOS outside India. The limit of ODI by the resident individual shall not exceed the overall limit prescribed by the RBI under the Liberalized Remittance Scheme, as prescribed by it from time-to-time.

Joint Ventures / Wholly Owned Subsidiaries Abroad

Indian investments abroad in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) are permitted by RBI.

There are various options available for investment under both the routes.

Note: For arriving at the net worth of an Indian party, the net worth of its holding company or its subsidiary may be taken into account to the extent it (the holding / subsidiary company) has not undertaken overseas investment and has issued a letter of disclaimer in favour of the Indian party.

Eligible Instruments

Investment can be in equity, loans, or by way of guarantees. Further, these guarantees can be – corporate or personal / primary or collateral and can be given by the Promoter Company / group company / sister concern / associate company in India. The amount and period of guarantee should be specified upfront. Form ODI will have to be filed with RBI for all guarantees given. All the guarantees will be considered while computing the overall limit of 400% of the net worth.

Investment in Compulsory Convertible Preference Shares will be treated at par with equity shares.

Resident Individuals can only invest through equity shares or Compulsory Convertible Preference Shares.

General Guidelines

1. Investments can be made in existing companies or new companies or for acquiring overseas business.
2. Registered Trusts and Societies engaged in manufacturing/ educational/ hospital sector in India can invest in a JV / WOS outside India, in the same sector, after obtaining prior permission of RBI.
3. The foreign entity can be engaged in any industrial, commercial, trading, agriculture, service industry, financial services such as insurance, mutual funds, etc. However, any overseas entity which has equity participation directly / indirectly by Indian parties cannot offer financial products linked to Indian Rupee (e.g., non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without obtaining specific approval of RBI. The rationale behind it is that the Indian Rupee is currently not fully convertible and such products could have implications for the exchange rate management of the country.
4. Investment in an overseas JV/WOS can be by way of:
   1. Drawal of foreign exchange from an AD Bank in India
   2. capitalization of exports of goods and services.

      (For contribution by way of exports, no agency commission will be payable to the WOS/JV. Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realization will require prior approval of RBI.)

   3. Swap of shares
   4. Proceeds from ECB/FCCBs
   5. In exchange of ADRs/GDRs
   6. Balances held in EEFC account of the Indian Party and
   7. Proceeds of foreign currency funds raised through ADR/GDR issues.
5. Investment under automatic route will not be permitted to parties on RBI Caution List, or who have defaulted to the banking system in India and whose names appear on the Defaulter’s list.
6. Share certificates/other documents where share certificates are not issued, should be submitted within six months from the date of investment and dividends, royalties, etc. due to Indian investor should be repatriated to India within 60 days of its falling due.
7. In case of partial/full acquisition of an existing foreign company, where (i) the investment is more than US $ 5 million or (ii) investment by way of swap of shares, irrespective of the amount, valuation of the shares of the company must be made by a Category-I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country. In all other cases valuation can be made by a Chartered Accountant or a Certified Public Accountant.
8. Indian Parties are allowed to issue corporate guarantees on behalf of their first level step down operating JV/WOS set up by their JV/WOS operating as either an operating unit or as a Special Purpose vehicle under the Automatic Route, subject to the condition that the financial commitment of the Indian Party is within the permitted limit. Such guarantee will have to be reported to the RBI.

   Further the issuance of corporate guarantee on behalf of second generation or subsequent level step down subsidiary will be considered under the Approval Route, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.

9. In the event of changes proposed in the JV/WOS regarding activities, investment in another concern / subsidiary or alterations of share capital, the IP should report such changes to RBI as prescribed.
10. Listed companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV/WOS under the Automatic route and Unlisted companies are permitted to write-off capital and other receivables up to 25 per cent of the equity investment in the JV/WOS under the approval route.

    Such write-off/ restructuring have to reported to the RBI along with a certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party and projections for the next five years indicating benefits accruing to the Indian party consequent to such changes within 60 days of write-off.

11. Disinvestment can be either under the automatic route or approval route. All such proposals should be accompanied by a Chartered Accountant’s valuation report. The Indian Party must submit details of such disinvestment through its designated AD within 30 days from the date of disinvestment.
12. Resident Indian does not need permission to accept appointment as Director on boards of overseas company or to act as Trustee of an overseas Trust.
13. Investment in Nepal can be made in Indian Rupees only. Investment in Bhutan can be made either in freely convertible currencies or in Indian Rupees. However, if investment is made in freely convertible currencies then all dues receivable on such investments as well as their sale/ winding up proceeds are required to be repatriated to India also in freely convertible currencies. An Indian Party can invest in an entity in Pakistan under an Approval Route.
14. Entities setting up Branch/JV/WOS overseas for trading in Commodities Exchanges Overseas will have to obtain clearance from the Forward Markets Commission.
15. Shares held in the overseas JV/WOS or Step Down Subsidiary (SDS) are allowed to pledge by way of security for availing fund based and/or non-fund based facilities for the IP or the JV/WOS from a Bank in India or abroad.
16. Creation of charge on movable/immovable property and other financial assets of the Indian entity and their group companies allowed under approval route within the overall limit of 400% of the net worth.
17. An Indian Party cannot invest in an overseas entity either set up or acquired directly or indirectly abroad, located in countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories.”. Investment/ financial commitments in Pakistan by Indian Parties are permissible under the approval route
18. An Indian party may create charge, by way of pledge, on the shares of JV/WOS or SDS outside India as a security in favour of an Authorized Dealer or a public financial institution in India or an overseas lender, for availing of fund based or non- fund based facility for itself or for its JV/WOS/SDS.
19. Resident Individual is allowed to invest only in operating JV/WOS and no step down subsidiary is allowed to be acquired or set up by the said JV/WOS.

Annual Performance Report

• An Indian Party should submit an Annual Performance Report (APR) in Form ODI through the designated AD, along with Audited Annual Accounts, Directors’ Report of the Overseas Company, on or before December 31 every year for reporting pre/post commencement of commercial operation.
• In case the law of the host country does not necessarily require auditing of the books of accounts of JV / WOS, the Indian Party may submit the APR based on the un-audited annual accounts of the JV / WOS only if the same has been adopted and ratified by the Board of the Indian Party. Such an exemption will not be available in respect of entities in a country which is under observation of Financial Action Task Force (FATF) or any other country as prescribed by the RBI.
• APR in case of resident individual investors has to be self – certified.

Investments by Employees

Investment in Agricultural Operations Overseas

An Indian company or a partnership firm registered under the Indian Partnership Act, 1932 is permitted to undertake agricultural operations including purchase of land incidental to such activity. Investment can be made either directly (through a branch) or through an overseas subsidiary/joint venture up to 400% of its net worth.

Investment by recognised star exporters

A proprietary concern/unregistered partnership firm engaged in the business of exports are permitted to invest up to 10% of the average three years export realization or 200% of their net owned funds, whichever is lower after obtaining prior approval of RBI, subject to the following conditions: –

1. The exporter should be classified as ‘Status Holder’ as per Foreign Trade Policy.
2. The exporter should be KYC compliant and must be engaged in the proposed business.
3. Export outstanding should not exceed 10% of the average export realisation of the preceding three years.
4. The exporter should not be on caution list of the RBI, etc.

Investment can be through an overseas subsidiary / joint venture. Application for approval will have to be made in Form ODI.

Remittance under the Liberalised Remittance Scheme (LRS) of US $ 250,000

An individual resident in India is permitted to remit outside India up to US $ 250,000 per financial year for any legal and lawful purpose without obtaining prior permission of RBI. An illustrative list of the permitted activities is as follows:

Even minors are eligible under this scheme but the LRS form needs to be countersigned by the minor’s natural guardian.

However, remittance facility under the Scheme cannot be used for the following:

Foreign Currency Account of Indian Party

An Indian party is permitted to open, hold and maintain a Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments (ODI) if the host country Regulations stipulate that investments into the country must be routed through a designated account in that country. This account can be used only for overseas investments in JV/WOS under ODI and receipt of entitlements from such investments. Normal procedure for repatriation of investment income and closure of bank account upon divestment will apply.

For greater insights about the issues on Overseas Direct Investment, kindly refer to FAQs by RBI at https://rbi.org.in/Scripts/FAQView.aspx?Id=32.

Reporting of Overseas Investment