Overseas Direct Investment (ODI) in India
Overseas Direct Investment or ODI is an investment made outside India in a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) either under Automatic Route or Approval Route. The investment is made by contribution to capital, subscription to memorandum of a foreign company, or acquisition of existing shares of a foreign entity by market purchase, private placement or stock exchange.
ICICI Bank has a comprehensive system in place for Capital Account Transactions. Our team offers you numerous services for smooth and easy end-to-end processing of ODI transactions. Sit back and watch your funds getting transferred as we take care of all your pre and post transaction hassles.
- One stop solution for ODI investment in JV or Wholly owned subsidiary
- Handholding through guidelines for Overseas Direct Investment
- ODI related query resolution through video and tele conferencing
- Facility to verify documents for regulatory reporting
- Dedicated capital account managers to serve any banking requirements
- Regular interaction and updating with RBI
Frequently Asked Questions (FAQs)
What is ODI and its importance?
Overseas Direct Investment or ODI stands for investments, by way of contribution to the capital or subscription to the memorandum of a foreign entity, or by way of 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.
How can I apply for an ODI?
Any Indian Party, which intends to make an Overseas Direct Investment shall approach a designated Authorised Dealer for making the remittance/investment, along with a duly filled form ODI Part I, along with the supporting documents like Board Resolution, Statutory Auditor Certificate, etc. Once the AD Bank scrutinises and approves the documents, as per the regulatory guidelines, the remittance/investment will be processed. A Unique Identification Number (UIN) will be generated for the particular Joint Venture/Wholly Owned Subsidiaries (JV/WOS) before the first remittance, and the same UIN shall be used for further investments/remittances in the JV/WOS.
How can I invest in an ODI?
Any Indian Party, which intends to make an Overseas Direct Investment shall approach a designated Authorised Dealer for making the remittance/investment along with the duly filled form ODI Part I, along with the supporting documents like Board Resolution, Statutory Auditor Certificate, etc. Once the AD Bank scrutinises and approves the documents as per the regulatory guidelines, the remittance/investment will be processed. A Unique Identification Number (UIN) will be generated for the particular JV/WOS before the first remittance, and the same UIN shall be used for further investments/remittances in the JV/WOS.
What is an example of an Overseas Direct Investment?
Example 1: Indian Company ABC Pvt. Ltd. engaged in the Smart Phone manufacturing business sets up an overseas company to expand its operations and leverage on the cheap labour costs of the host country.
Example 2: Mr. X, a resident individual, finds potential in an overseas company and wants to invest and contribute to the growth of the company.
What is the ODI limit?
The eligible limit for the financial commitment by an Indian Party is % of its net worth (the maximum permissible amount is USD billion per financial year), as per the latest audited balance sheet.
According to the prevailing regulations, resident individuals may remit up to $ <2,50,000>, per financial year.
In which sector is the ODI not allowed?
Indian Parties are not permitted to invest in a foreign entity engaged in Real Estate business activity. Real Estate (meaning buying and selling of Real Estate or trading in Transferable Development Rights (TDRs), not including the development of townships, construction of residential/commercial premises, roads or bridges) and banking business, are two activities which need prior approval of RBI, before investing.
An Indian Party is also prohibited from investing in an overseas entity, which offers financial products linked to the Indian Rupee (such as non-deliverable trades involving foreign currency, stock indices linked to the Indian market, rupee exchange rates, etc.) and any investments in these entities, need prior approval from the Reserve Bank of India.
Who is eligible for an ODI?
- a Company
- a Body created under an Act of Parliament
- a Partnership Firm registered under the Indian Partnership Act, 1932
- Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008
- Any other entity in India, as notified by the RBI
- Resident Individuals under the Liberalised Remittance Scheme (LRS).
What are ODI rules?
ODI is governed by the FEMA 120 (R) rules of FEMA guidelines.
What is an ODI certificate?
There is no separate certificate known as an ODI Certificate.
What is direct investment outside India and who all are eligible for the investment under Automatic Route?
Direct investment outside India means investments outside India under automatic route and approval route by contribution to capital or subscription to Memorandum of Association of a foreign entity or purchase of existing shares of a foreign unit either by market purchase, private placement, or stock exchange, not including portfolio investment.
An Indian Party (IP) that is eligible to make direct investment outside India under automatic route is defined as 'a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, or a Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008 (6 of 2009), investing in a Joint Venture or Wholly Owned Subsidiary overseas, and includes any other entity in India as may be notified by the Reserve Bank'. So, when more than one such company, body, or entity invest in the foreign unit, all such companies or institutions or entities shall together constitute the 'Indian Party'.
What is the difference between a Joint Venture (JV) and a Wholly Owned Subsidiary (WOS)?
The Joint Venture is the foreign entity where there would be foreign stakeholders along with the IP/Resident Individual (RI), while in a WOS, the entire stake is owned by IP/RIs.
Whom should I approach for making a direct investment in an overseas entity under automatic route and what is the procedure?
Any Indian Party which intends to make an overseas direct investment shall approach a designated Authorised Dealer for making the remittance/investment along with duly filled form ODI Part I along with the supporting documents like Board Resolution, Statutory Auditor Certificate, etc. Once the AD Bank scrutinises and approves the documents as per the regulatory guidelines, the remittance/investment will be processed. A Unique Identification Number (UIN) will be generated for the particular JV/WOS before the first remittance, and the same UIN shall be used for further investments/remittances in the JV/WOS.
What is Financial Commitment, and the maximum permissible amount under automatic route?
Financial Commitment' comprises of the direct investment made by the Indian party through equity, loan, 100 percent of the amount of guarantees and 50 percent of the performance guarantees issued by an Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary. The eligible limit for the financial commitment by an Indian Party is 400% of its net worth (the maximum permissible amount is USD 1 billion per financial year) as per the latest audited balance sheet.
Is it permissible to consider the net worth of the Indian Subsidiary/holding company when the intended overseas investment by an Indian Party exceeds its net worth?
Yes, it is permissible for an Indian Party to consider the net worth of the Indian subsidiary/holding company for making an overseas investment to the extent not availed of by the holding company or the subsidiary company autonomously subject to:
- The holding company holds at least 51% direct stake in the Indian Party
- The Indian Party holds at least 51% of direct stake in its subsidiary company
- The holding or subsidiary company furnishes a letter of disclaimer for the same in favour of the Indian Party.
The facility is not available to/from partnership firms.
What are the sources of funding for the overseas investments which are permitted under automatic route?
Any of the below sources can fund the overseas investments in JV/WOS:
- Drawal of foreign exchange from an Authorised Dealer bank in India
- Balances held in Exchange Earner's Foreign Currency (EEFC) Account of the Indian Party
- Proceeds of Foreign Currency Convertible Bonds (FCCBs)/External Commercial Borrowings (ECBs)
- Swap of shares
- In exchange of American Depository Receipts/Global Depository Receipts (ADRs/GDRs) issued as per the scheme for the issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India
- Proceeds of foreign currency funds raised by ADR/GDR issues
- Capitalisation of exports and dues from foreign entity
What are the reporting requirements and other obligations for an Indian Party post remittance/investment?
- Indian Party has to submit the Share Certificates or any other documentary evidence for the investment to the designated AD Bank within six months of the remittance/investment.
- An Annual Performance Report Overseas Direct Investment (ODI Part II) in respect of each JV or WOS has to be submitted by the Indian Party to the designated AD Bank before the stipulated timeline every year.
- Indian Party is obligated to repatriate all dues receivable from the foreign entity, such as dividend, technical fees, royalty, etc., within 60 days of its falling due, or similar further period as the Reserve Bank may permit.
- Indian Party has to report the changes made concerning JV/WOS like diversification of its activities/setting up of step down subsidiaries/change in the shareholding pattern within 30 days of the approval of the decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country.
- The sale proceeds in case of disinvestment shall be repatriated to India within 90 days from the date of sale of the shares/securities and reporting needs to be done to Reserve Bank through designated AD Bank within 120 days from the date of disinvestment.
What are the conditions to be fulfilled by an Indian Party for making an overseas investment/financial commitment in a JV/WOS engaged in Financial Services sector?
To invest, the Indian Party should comply with the below conditions:
- Should be registered with the concerned regulatory authority in India for engaging in financial sector activities
- Net profit should be earned during the preceding three financial years from the financial services activities
- Necessary approvals to be obtained from the concerned regulatory authorities concerned both in India and abroad for venturing into such financial sector activity
- Capital adequacy norms prescribed by the concerned regulatory authority in India should be fulfilled.
Can an Indian Party make investments through different Authorised Dealer Banks for the same overseas Joint Venture/ Wholly Owned Subsidiary (JV/WOS)?
All the transactions of a particular overseas JV/WOS shall be routed through a single Authorised Dealer Bank. In case the Indian Party decides to change the existing Authorised Dealer Bank, an NOC should be obtained from the bank for the same and send an application to Reserve Bank by way of a letter.
How do we define the Core Business Activity of an Indian Party?
Any activity engaged by an Indian Party through which the total turnover in the previous accounting year is more than 50% of the total turnover of the company is the Core Business Activity.
Can an Indian Party invest in the overseas entity by way of Share Swap?
Yes, an Indian party can invest in the overseas entity. The valuation of the shares will have to be made by a Category I Merchant Banker who is registered with Securities and Exchange Board of India (SEBI), or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
What are the dues/receivables from a foreign entity which are permitted to be capitalised under automatic route?
An Indian Party can capitalise dues and entitlements from the foreign entity such as export proceeds, royalties, other fees for technical know-how supply, managerial, consultancy and other services within the permissible ceilings under the automatic route. Export proceeds which are being capitalised beyond the prescribed period of realisation will require prior approval of the Reserve Bank.
Indian software exporters are allowed to receive 25 percent of the value of the exports made to an overseas software startup company in the form of shares without entering into Joint Venture Agreements, with prior approval from the Reserve Bank.
Can an Indian Party invest in a foreign entity which is engaged in real estate activity under automatic route? Are there any prohibitions for the overseas investment by an Indian Party?
No, Indian Parties are not permitted to invest in a foreign entity engaged in real estate business activity. Real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) not including the development of townships, construction of residential/commercial premises, roads or bridges) and Banking business are two activities which need prior approval of RBI before investing.
Indian Party is also prohibited from investing in an overseas entity which offers financial products linked to Indian Rupee (such as non-deliverable trades involving foreign currency, stock indices linked to the Indian market, rupee exchange rates, etc.) and any investments in these entities need prior approval from Reserve Bank.
Is it permitted for an Indian Party to invest JV/WOS through Special Purpose Vehicle (SPV) under automatic route?
Yes, it is permissible for an Indian Party to make overseas investment in JV/WOS through SPV. The IP cannot remit funds directly to JV/WOS; all of the funding shall be routed through the SPV only. However, corporate guarantees can be issued on behalf of its first level step down subsidiary within permissible limits of financial commitment of Indian Party.
Do I need prior approval of Reserve Bank for converting the loan provided to a foreign entity into equity?
Indian Party can convert the loan provided to foreign party into equity/Compulsorily Convertible Preference Shares (CCPS) under the automatic route, and the same should be reported to Reserve Bank through the designated Authorised Dealer Bank by way of a letter.
Explain Employee Stock Option Plan (ESOP) under Liberalised Remittance Scheme (LRS) for Resident Individuals
Resident individuals can purchase equity shares presented by a foreign company under its ESOP Schemes, if he/she is an employee, or, a director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV) irrespective of the percentage of the direct or indirect equity stake in the Indian company provided (i) the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis and (ii) an Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category – I, Bank giving details of remittances/beneficiaries, etc.
Is RBI approval required while granting ESOPs through a Trust or an SPV or by their step down subsidiary?
The Authorised Dealer Banks are permitted to allow remittance for acquiring shares under an ESOP Scheme, wherein the shares under the scheme are offered directly by the issuing company or offered indirectly through a trust/ SPV/step down subsidiary, provided:
- The company issuing the shares, directly or indirectly, effectively holds in the Indian company, whose employees/directors are offered shares, at least 51 percent of its equity
- The shares under ESOP Scheme are offered globally on a uniform basis by the issuing company
- An Annual Return is submitted by the Indian company to the RBI through the Authorised Dealer Banks, giving details of remittances, beneficiaries, etc. in the prescribed format.
Can foreign companies repurchase the shares issued to residents in India under any ESOP Scheme?
Yes, provided the following conditions are met:
- The shares should have been issued per the Rules/Regulations framed under Foreign Exchange Management Act, 1999
- The shares should be repurchased in terms of the initial offer document
- An Annual Return in the prescribed form should be submitted through the Authorised Dealer Banks, giving details of remittances, beneficiaries.
Can a person resident in India transfer by way of sale of the shares acquired as cashless ESOP or purchased ESOP?
Yes, provided that the proceeds are repatriated instantly on receipt thereof and in any case not later than 90 days from the date of sale of such securities.
What is Liberalised Remittance Scheme and what is it used for?
The Liberalised Remittance Scheme (LRS) of the RBI allows resident individuals to send a certain amount of money during a fiscal year to another country for investment and expenditure.
According to the prevailing regulations, resident individuals may remit up to $2,50,000 per financial year. The scheme is not available to corporates, HUF, Trusts, partnership firms, etc.
Can remittances under the Liberalised Remittance Scheme (LRS) facility be consolidated in respect of family members?
Remittances under the facility can be consolidated in respect of close family members subject to individual family members complying with the scheme’s terms and conditions. However, clubbing is not allowed by other family members for capital account transactions like opening a bank account, investment, or purchase of property, if they are not the co-owners of the investment, property, or overseas bank account.
Is there any limit applicable to the frequency of the remittance?
There is no limit on the frequency of remittances under LRS. However, the total amount of foreign exchange purchased from or remitted through all the sources in India during a fiscal year should be within the cumulative limit of USD 2,50,000.
What are the prerequisites for the remitter to remit funds under LRS?
The applicants must have maintained the bank account for a minimum period of one year before the remittance for capital account transaction. The same bank will be designated AD bank. He/She has to furnish Form A-2 regarding the purpose of the remittance and declare that the funds belong to him and will not be used for purposes prohibited or regulated under the scheme.
Can an individual, who has exhausted the limit of LRS in the financial year, avail of the facility once again?
Once a remittance is made for an amount up to USD 2,50,000 during a given financial year, he/she would be unable to make any further remittances under the scheme, even when the proceeds of the investments are brought back into the country. However, he/she can approach RBI for approval to remit beyond USD 2,50,000.
Can remittances be made to acquire Joint Ventures abroad?
From Aug 05, 2013, the scheme can be used by resident individuals to acquire JV/WOS outside India for bonafide business activities within the limit of USD 2,50,000 subject to the terms and conditions stipulated in FEMA Notification No. 263.
Are remittances made only in US Dollars?
No, the remittances can be made in any freely convertible foreign currency that is equivalent to USD 2,50,000 in a financial year.
Whether LRS can be used for acquiring both listed and unlisted shares of an overseas company?
With respect to the extant FEMA provisions, LRS can be used to acquire both listed and unlisted shares of an overseas company.
Whether an individual can provide loan to JV/WOS abroad?
No, since the individual is only eligible to acquire the shares of JV/WOS, hence not eligible to provide loan under the automatic route. So, if an individual wants to provide loan to JV/WOS abroad, he/she needs to take RBI approval for the same.
What is Annual Performance Report (APR)?
An Indian Party (IP)/Resident Individual (RI) that has made an Overseas Direct Investment (ODI) is required to submit an Annual Performance Report (APR) in Form ODI Part II to the AD Bank with respect to each Joint Venture/Wholly Owned Subsidiary outside India.
What is the timeline for filing of APR?
APR to be filed by Dec 31 every year.
What is the certification criteria for APR?
The APR has to be certified by the statutory auditor of the Indian Party. Certification of APRs by Chartered Accountant or Statutory Auditor shall not be insisted upon in the case of Resident Individuals. In such cases, self-certification can be accepted.
Who is responsible for filing APR in case multiple IPs/RIs have invested in the same overseas JV/WOS?
In case multiple IPs/RIs have invested in same overseas JV/WOS, the responsibility to submit APR lies with the IP/RI having a maximum stake in the JV/WOS. Alternatively, the IPs/RIs may mutually agree to assign the obligation for APR submission to a designated entity that may acknowledge its obligation and furnish an appropriate undertaking to the AD bank.
What is the primary document to be submitted along with APR?
A copy of audited financial statements of the overseas JV/WOS (on a standalone basis) is to be filed along with the APR.
Is it required to file APR in a host country where the law does not compulsorily require book auditing of accounts of JV/WOS?
The APR can be submitted by the Indian Party based on the un-audited annual accounts of the JV/WOS provided**:
(i) The Statutory Auditors of the Indian Party certify that law of the host country does not mandatorily require auditing of the books of accounts of JV/WOS and the figures in the APR are as per the un-audited accounts of the overseas JV/WOS; and
(ii) That the un-audited annual accounts of the JV/WOS have been adopted and ratified by the Board of the Indian Party.
(**The above exemption from filing the APR based on the unaudited balance sheet will not be available in respect of JV/WOS in a country/jurisdiction which is either under the observation of the Financial Action Task Force (FATF) or in respect of which enhanced due diligence is recommended by FATF or any other country/jurisdiction as prescribed by Reserve Bank of India.)
Can Resident individual acquire foreign securities as a gift from a person outside India?
Notification No. FEMA.120/RB-2004 (Foreign Exchange Management (Transfer or Issue of any Foreign Security)-Amendment Regulations, 2004) prescribes regulation as under:
General Permission is granted under Regulation 22 (1) (i) that a Resident Indian person, being an individual, may acquire foreign securities as gift from a person resident outside India.
Can Resident Individual use the LRS formulated under the Foreign Exchange Management Act (FEMA) for purpose of gift?
Yes, Resident Indian can remit amount up to $2,50,000 a year for remittance towards gift, donation, maintenance of close relatives.
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