What is an Overseas Direct Investment?

February 23, 2022

What is an Overseas Direct Investment?

Overseas Direct Investment (ODI) refers to investments made by Indian entities in a foreign country. In this form of investment, Indian companies and individuals can enter into a Joint Venture (JV) or have their Wholly-Owned Subsidiary (WOS) in a different country.

For instance, an Indian automobile manufacturer sets up a company in a new country to benefit from the low labour costs of that country. Sectors such as real estate and banking are prohibited from Overseas Direct Investment.

Benefits of ODI:

  • ODI is made with the view to diversify the current businesses of an Indian entity outside the country
  • They are recognised as important avenues for promoting the global reach of Indian entrepreneurs
  • ODIs allow technology transfers, enables sharing of skills and results of R&D
  • They serve as a bridge to the global market and enhance a company's image abroad 
  • ODIs are vital engines of foreign trade, through exports from India. They are a source of foreign exchange earnings by way of dividends, royalty, technical know-how fees and other entitlements.

ODI Routes

ODI can be achieved through two routes:

Automatic route:

 

  • In this mode, an Indian company does not need to seek approval from the RBI for making any overseas investment
  • However, the Indian entity needs to reach out to an Authorised Dealer Category-1 Bank with the prescribed documents for making such an investment
  • In case an Indian company is investing in the financial services sector, the regulatory authority in India and the host country need to give their nod of approval
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  • Also, there are certain pre-requisites that the Indian company needs to comply with, to apply under the automatic route.

Approval route:

  • Companies that do not comply with the required conditions under the automatic route will require the Reserve Bank of India's green signal
  • Similar to the automatic route, the company will have to reach out to an Authorised Dealer Category-1 Bank (AD Bank) and apply with the required documents. Following specific recommendations of the designated AD Bank and furnishing of the supporting documents, the AD Bank will submit the proposal to the Reserve Bank of India after due scrutiny.

Overseas Direct Investment by Resident Individuals

  • Resident individuals can also go for an ODI by way of JV or WOS outside India, under the Liberalised Remittance Scheme (LRS)
  • This scheme allows Resident Individuals, including minors, to freely remit up to US$ 250,000 per financial year
  • Investors opting for this route should repatriate the income they've earned on the investments within 60 days, as per the FEMA guidelines. No write-off of the income is allowed
  • RBI allows Resident Individuals to form a company outside India under the LRS, within dictated limits.

Recent Overseas Direct Investments, made by Indian companies:

  • In February 2020, Bharti Airtel invested US$ 978.92 million in its wholly-owned subsidiary in Mauritius
  • Interglobe Enterprises invested US$ 145.61 million in a joint venture, based in the UK
  • In May 2021, the Serum Institute of India announced its US$ 332.38 million investment plan in the UK to expand its vaccine business and to open a new sales office
  • In September 2019, Reliance Power announced a joint venture with the Japanese energy giant JERA to jointly set up a 750 MW gas-based combined cycle power project in Meghnaghat in Bangladesh
  • In September 2019, Oyo acquired Copenhagen-based data science firm Danamica. This marked the fastest-growing lodging start-up to expand its business into Europe.

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