Overseas Direct Investment (ODI).

 

What is ODI ?

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 to invest in 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 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?

 

·         Company

·         Body created under an Act of Parliament

·         Partnership Firm registered under the Indian Partnership Act, 1932

·         Limited Liability Partnership (LLP), registered under the LLP Act, 2008

·         Any other entity in India, as notified by the RBI.

·         Resident Individuals under the Liberalized Remittance Scheme (LRS).

 

What are ODI rules?

 

ODI is governed by the FEMA 120 (R) rules of FEMA guidelines.

 

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'.

 

To whom should 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 (AD)  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.

·          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. 

·         Capitalization 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.

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.

 

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.

 

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.

APR to be filed by Dec 31 every year.

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.