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.
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