LEARN THE ESSENTIALS OF OVERSEAS DIRECT INVESTMENT (ODI)

Introduction

Overseas Direct investment (ODI) is regulated by the Reserve Bank of India and the Government of India under Foreign Exchange Management Act [FEM (Transfer of issue of any foreign security) Regulation, 2004] through Notification FEMA 120/2004-RB, dated 7.7.2004. Till a few years back, we used to talk about Foreign Direct Investment (FDI) not so much talk was there for ODI. In view of the growing participation of Indians in World economy, there is lot of investment is taking place overseas by the Indian entrepreneurs both BIG and SMALL.

Overseas Direct Investment means investment by way of contribution to the capital or subscription to memorandum of association of a foreign entity or by way of purchase of shares of foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment. In this paper, very briefly discuss how an Indian invest overseas.

Who Are Eligible?

An Indian Party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. Indian party is defined as all entities, including Resident Individual, proprietorship, -partnership firm registered under Indian Partnership Act, 1932, Limited Liability Partnership form and incorporated under –the Limited Liability Partnership Act, 2008, trust registered under Indian Trust Act, 1882 & Society registered under Society Registration Act, 1860 and Company incorporated in India or a body created under the act of Parliament or any other entity in India as may be notified by the Reserve Bank of India.

How To Invest?

For the sake of facilitation, there are two methods being prescribed under FEMA regulations i.e. Automatic Route and Approval Route. Most of the sectors are open for ODI with some negative list sectors like real estate, gaming and betting etc.

The total financial commitment of the Indian Party in Joint Venture or Wholly Owned Subsidiaries shall not exceed 100% or as decided by RBI from time to time , of the net worth of the Indian Party as per last audited balance sheet. The investment should be for bona fide business activity. The Indian party should not be in the RBI exporters caution list or list of defaulters of banking system. No investment is allowed in an overseas entity directly as JV/WOS or indirectly as Step down subsidiary located in the Countries identified by the Financial Action Task Force (FATF) as “non-cooperative countries and territories.

Investment within the limit prescribed under ODI regulation can be funded out of one or more of the following sources:

• Out of Balance held in Exchange Earners Foreign Currency Accounts of the Indian Party.
• Cash Remittances by market purchase.
• Capitalization of Export proceeds.
• Utilization of the amount raised by issue of ADRs/GDRs by the Indian Party.
• Utilization of the amount from External Commercial Borrowings (ECBS).

Investment By Individuals:

 A resident Individual either single or in association with another resident individual or with Indian party satisfying certain criteria may make overseas direct investment in equity shares or compulsorily convertible preference shares of a JV/WOS outside India.

Acquisition Of Foreign Securities by Resident Individual

A resident individual may acquire the shares of the foreign entity in or full consideration of the professional services rendered to the foreign entity or in lieu of director’s remuneration within the overall ceiling for him under Liberalized Remittance Scheme (LRS) in force at the time of acquisition. He may apply to RBI for the permission acquire the shares of the foreign entity exceeding LRS limit.

In case of permission, the RBI shall take into consideration the following factors:

• Credential, net worth and nature of profession of the resident individual.
• The extent of his foreign exchange earnings and balance in EEFC and RFC account.
• Financial and business track record of the foreign entity.
• Potential for forex inflow to the Country.
• Other likely benefits to the country
  

General Permission By RBI In Certain Cases Of ODI:

A resident individual may acquire foreign securities:

• By way of gift from person resident outside India; or
• BY way of cashless ESOP; or
• By way of inheritance from a person whether resident in or outside India. Or
• By way of ESOP issued by foreign entity on the basis of uniform policy on complying certain conditions.
• By way of qualification/right shares issued by foreign entity on complying certain conditions.
  

Transfer Of Foreign Securities By Resident Individual

A Resident Individual can transfer/sales the shares as acquired by him under above described procedure without prior approval of RBI provided the sale proceeds are repatriated into India through banking channel and documentary evidence is being submitted to the authorized dealer.

Investment By Proprietorship Concern Or Unregistered Partnership Firm

Proprietorship concern or unregistered Partnership firm satisfying certain criteria may make overseas direct investment in equity shares or compulsorily convertible preference shares of a JV/WOS outside India.-

 Investment By Registered Trust/Society:

Registered Trust/Society engaged in manufacturing or educational sector and which have set up hospitals in India may invest in the same sectors in JV/WOS outside Indian with prior approval of RBI.

Compliance Requirements:

There are certain regulatory requirements to keep a track of the investment such as filling certain periodical information/returns with the regulator with regard to initial /post investment.

Exit Route:

The Indian entities can exit the investment by way of sale provided the proceeds of sale to be repatriated within the specified time limit.

Way Ahead:

The government of India is promoting Indian entrepreneurs to invest overseas and therefore making it very convenient for them to GO GLOBAL. In this direction government of India is taking the regulatory framework on the fast track and making reporting requirements easy to comply.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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