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.

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.

Prior Permission required

Investments in Real Estate Business (buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) and Banking requires prior approval of RBI.

General Permissions

1. Reserve Bank of India has granted general permission to residents for purchase/acquisition of securities and sale of shares/securities so acquired :
   • Out of funds held in RFC account; and
   • As bonus shares on foreign securities held in accordance with the provisions of the Act or rules or regulations made thereunder.
2. General permission has also been granted to a person who is not permanently resident in India for purchase of securities out of foreign currency resources outside India as also for sale of securities so acquired.
3. A Resident individual (single or in association with another resident individual or with an ‘Indian Party’) satisfying the criteria as prescribed, may make ODI 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 be within the overall limit prescribed by the RBI under the Liberalised 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.

Investments can be made under the automatic route up to 400% of the net worth (subject to a maximum investment of ₹ 1 billion. Investment exceeding ₹ 1 billion will be under the approval route) of the Indian party as on the date of the last audited balance sheet, in which case prior permission is not required, or the approval route, in which case prior permission from RBI is required. 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.

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 having equity participation directly / indirectly of 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 since 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 drawal of foreign exchange from an AD Bank in India, or capitalization of exports of goods and services. For contribution by way of exports, no agency commission will be payable to the WOS/JV.
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 the specified time and dividends, royalties, etc. due to Indian investor should be repatriated to India in accordance with the prevailing time limits.
7. Authorised dealers have been permitted to release FX for feasibility studies prior to actual investment.
8. In case of partial/full acquisition of an existing foreign company, where the investment is more than US $ 5 million or investment by way of swap of shares, irrespective of the amount, valuation of the shares of the company shall 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 by a Chartered Accountant or a Certified Public Accountant.
9. In the event of changes proposed in the JV/WOS regarding activities, investment in another concern / subsidiary or alterations of share capital, there are reporting requirements to RBI.
10. 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 is required to submit details of such disinvestment through its designated AD within 30 days from the date of disinvestment
11. 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.
12. 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.
13. Entities setting up Branch/JV/WOS overseas for trading in Commodities Exchanges Overseas will have to obtain clearance from the Forward Markets Commission.
14. Shares held in the overseas JV/WOS or Step Down Subsidiary (SDS) can be pledged by way of security for availing fund based and/or non-fund based facilities for itself or the JV/WOS from a Bank in India or abroad.
15. 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.
16. 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.”

Annual Performance Report

Annual Performance Report (APR) in Form ODI through the designated AD should be submitted on or before December 31 every year for pre/post commencement of commercial operation. Audited Annual Accounts, Directors' Report of the Overseas Company are also required to be submitted. Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the APR may be submitted by the Indian Party based on the un-audited annual accounts of the JV / WOS provided the un-audited annual accounts of the JV / WOS have 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..

Investments by Employees

An employee or Director in India of an Indian office or branch of a foreign company or of a subsidiary in India of foreign company or of an Indian company irrespective of foreign equity holding (whether directly or through a SPV or step down subsidiary) may purchase equity shares without any monetary ceiling. The shares so acquired can also be repurchased by the foreign company/sold without obtaining RBI permission provided the sales proceeds are repatriated to India.

An employee or Director of the Indian promoter company of an overseas JV/WOS engaged in the field of software can purchase shares for a consideration that does not exceed the ceiling as stipulated by RBI from time to time. The shares so acquired should not exceed 5% of the paid- up capital of the JV/WOS. The percentage of shares held by the Indian promoter company together with the shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to the allotment of shares to the employees.

Further, a resident employee (including working director) of companies based in the knowledge-based sectors (information technology, pharmaceuticals, biotechnology) can purchase foreign securities under the ADR/GDR linked Employees’ Stock Option Scheme for a consideration that does not exceed the ceiling as stipulated by RBI from time to time. The issue of employees’ stock option by a listed company shall be governed by SEBI (Employees’ Stock Option and Stock Purchase Scheme) Guidelines, 1999 and the issue of employees stock option by an unlisted company shall be governed by the guidelines issued by the Government of India for issue of ADR/GDR linked stock options.

Portfolio Investments – Automatic Route

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 realisation 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 have exports exceeding ₹15 crore per annum.
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:

The updated list can be seen at the website of FATF - http://www.fatf-gafi.org. An application-cum-declaration form is required to be filed with the AD.

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.