Overseas Direct Investment (ODI)

With India’s growing economy, more Indian companies are venturing into international markets. These global investments are governed by the Foreign Exchange Management Act (FEMA). A critical component of FEMA is the Overseas Direct Investment (ODI) Rules and Regulations, which permit Indian residents to invest in foreign entities. This article explores the key aspects of ODI guidelines and what they mean for Indian investors.

Resident Individuals (RIs) or Indian Entities (IEs) such as Companies, Firms, or LLPs may choose to set up or invest in the equity of a foreign company. If the investment is made in collaboration with a foreign partner, the entity is called a Joint Venture (JV). If Indian shareholders hold 100% equity, it is referred to as a Wholly Owned Subsidiary (WOS). These investments—whether in a JV or WOS—must be reported to the Reserve Bank of India (RBI) through an Authorized Dealer (AD) Bank.

Foreign Exchange Management Act (FEMA), 1999

Under FEMA, Capital Account Transactions refer to those that impact the assets or liabilities—whether actual or contingent—of an Indian resident outside India, or those of a non-resident within India.

Current Account Transactions, on the other hand, involve dealings that do not qualify as capital account transactions. These typically relate to regular income or expenditure by Indian residents.

A core principle of FEMA is that if a transaction is not permitted directly, it must not be carried out indirectly either. Any attempt to bypass regulations through indirect means is considered a violation and may lead to penalties.

i. For Resident Individuals: The Liberalized Remittance Scheme (LRS), introduced by the Reserve Bank of India (RBI), governs how resident individuals can send funds abroad for various purposes, including Overseas Direct Investment (ODI).

ii. For Indian Entities: The Overseas Investment (OI) Rules were revised in August 2022 to enhance the overseas investment structure for Indian businesses. Accordingly, all remittances by individuals, companies, firms, or LLPs must comply with the updated regulatory framework.

iii. Investment Limit under LRS:
Under the Liberalized Remittance Scheme (LRS), all Resident Individuals (RIs), including minors, can remit up to USD 250,000 per financial year (April to March) abroad. This limit applies to all permissible transactions under both Current and Capital accounts, or a mix of the two.

iv. Investment Limit for Companies/Firms/LLPs:
An Indian company, firm, or LLP can make a total financial commitment in overseas entities up to 400% of its net worth, based on the most recent audited balance sheet. Any remittance exceeding this threshold requires prior approval from the Reserve Bank of India (RBI).

v. ODI Investment Routes:
Indian investors can choose from two available routes to undertake Overseas Direct Investment (ODI):

• Automatic Route
  
  

• Approval Route
  
  

vi. Restricted Sectors for ODI:
Investments are not permitted in foreign entities involved in the following activities:

• Real estate activity*
  
  

• Any form of gambling
  
  

• Transactions involving financial products linked to the Indian Rupee without explicit RBI approval
  
  

*Note: “Real estate activity” refers to buying, selling, or trading in real estate or Transferable Development Rights. It does not include infrastructure projects like township development, or construction of roads, bridges, residential, or commercial buildings for sale or lease.

vii. Methods of Investing in a Foreign Entity under the ODI Framework:

Investment in overseas entities can be made through several modes, including:

• Purchase of equity in an unlisted foreign company
  
  

• Subscription to the Memorandum of Association of a foreign entity
  
  

• Acquisition of over 10% equity in a listed foreign company
  
  

• Investments below 10% in listed entities where the investor has control
  
  

• Acquisitions through bids, tenders, rights issues, or bonus shares
  
  

• Capitalization of outstanding dues
  
  

• Exchange of securities, or through gift/inheritance
  
  

• Acquisition via employee benefit schemes such as sweat equity or ESOPs
  
  

• Investments through mergers, demergers, amalgamations, or other restructuring schemes
  
  

viii. Documentation and Reporting Requirements for Indian Remitters:

Resident investors must submit Form FC (Sections A to E) to the designated Authorized Dealer (AD) bank for any overseas investment—whether under the Automatic or Approval Route.

Submission Timeline: The form must be filed at the time of financial commitment or outward remittance, whichever comes first. For example, subscribing to a foreign company’s Memorandum is considered a financial commitment. To avoid Late Submission Fees (LSF), Form FC should be submitted before the incorporation of the foreign entity.

Additional required documents include Form A2, clean outward remittance forms, etc. Documentation requirements may differ across banks, so prior consultation with the concerned bank is advisable.

Valuation Report: When making subsequent investments in the share capital of a foreign company, a valuation report from a Chartered Accountant or Merchant Banker is necessary. However, this is not required for the initial MOA subscription.

Deferred Payment Agreements: These are mandatory when investing under the new Overseas Investment (OI) regulations through installment-based payments.

ix. Post-ODI Compliance:

After completing the ODI process, the Indian investor must submit share certificates or other proof of investment in the overseas entity to the AD Bank within 180 days (six months) from the date of remittance, in a manner satisfactory to the Reserve Bank of India (RBI).

An Annual Performance Report (APR) must be filed for each Joint Venture (JV) or Wholly Owned Subsidiary (WOS) located abroad on or before December 31 each year. Practically, it’s advisable to file the APR by November 30 to avoid delays from the bank’s end.

Audit of Foreign Entity’s Accounts:
To file the APR, it is mandatory that the foreign entity’s financial statements are audited either by a local CPA or an Indian Chartered Accountant, as per RBI norms. Some banks insist on an audit by a foreign CPA, while others accept audits done by Indian CAs.

Foreign Liabilities and Assets (FLA) Return:
All Indian entities (excluding resident individuals) that have received Foreign Direct Investment (FDI) or made Overseas Direct Investment (ODI) in the previous financial year must submit the FLA return by July 15 annually via the RBI’s FLAIR portal.

x. Repatriation:

Indian investors holding ODI in foreign entities must ensure repatriation of:

• Any dues from the overseas company,
  
  

• Proceeds from the sale or transfer of shares, or disinvestment,
  
  

• Amounts received upon liquidation of the foreign entity.
  
  

Timeline: These funds must be realized and brought back to India within 90 days from the due date, date of transfer or disinvestment, or the date when the liquidator distributes the assets.

xi. Additional Considerations:

For specific events such as changes in the shareholding structure, disinvestment from ODI, or transfer of shares in the foreign entity, appropriate reporting must be submitted to the Authorised Dealer (AD) bank within the stipulated timeline.

In certain cases, submission of the Annual Performance Report (APR) may not be required, depending on the nature of the investment and RBI guidelines.

If an Indian entity acquires a Step Down Subsidiary (SDS) abroad, it must comply with the applicable provisions under FEMA, including mandatory reporting and documentation as per regulatory requirements.