Investing in companies or assets outside of India is known as overseas direct investment. Overseas Direct Investment (ODI) allows Indian residents, including individuals, firms, and companies, to invest in foreign businesses or projects. What is the limit of ODI investment? Indian entities can invest up to 400% of their net worth abroad, as per RBI regulations.
Who is eligible for ODI? Resident individuals, partnership firms, limited liability partnerships, and companies can undertake ODI, provided they meet the requirements.
What is overseas direct investment? It is a means for Indian entities to expand globally, establish a lasting interest, and tap into international markets.
Investments in entirely owned subsidiaries or joint ventures can be made by public and private limited corporations, partnership companies registered under the Indian Partnership Act of 1932, and limited liability partnerships registered under the LLP Act of 2008. Additionally, residents are able to invest abroad. The LRS allows for investments in mutual funds, foreign securities, real estate, and other assets totaling up to USD 250,000 every fiscal year. The investment must abide by the RBI’s reporting guidelines, which include submitting the appropriate paperwork to the RBI and authorized dealers.
Please note that Sole proprietorship and unregistered partnership entities are not eligible to make ODI in WOS or JVs under automatic route.
Any monetary commitment up to USD 1 billion in a financial year does not require prior RBI clearance if the Indian party’s entire commitment falls within the acceptable limit under the Automatic Route (i.e., falls within 400% of net worth as per the most recent audited balance sheet).
All transactions related to overseas investments must be routed through the same AD bank, ensuring compliance with the guidelines issued by the RBI.
Financial commitments in overseas JVs/WOS consist of equity shares, Compulsorily Convertible Preference Shares (CCPS), other preference shares, loans, guarantees (excluding performance guarantees), and bank guarantees (backed by a counter guarantee/collateral by the Indian party).
Investments and financial commitments in overseas JVs/WOS must adhere to specific conditions:
a. The designated AD bank must monitor the receipt of documents and ensure their authenticity.
b. Certification of APRs by a Statutory Auditor or Chartered Accountant is not required for resident individuals; self-certification is acceptable.
c. If multiple IPs/RIs have invested in the same overseas JV/WOS, the one with the maximum stake is responsible for submitting the APR. Alternatively, stakeholders can mutually agree to assign this responsibility to a designated entity.
d. Reporting requirements, including submission of APR, also apply to investors in unincorporated entities in the oil sector.
e. If the host country’s law does not mandate auditing of JV/WOS books, the APR may be submitted based on un-audited accounts if certain conditions are met (e.g., certification by the Indian Party’s Statutory Auditors, adoption and ratification of accounts by the Indian Party’s Board, and not being located in a country under FATF observation or requiring enhanced due diligence).
f. All Indian businesses that have received or made Foreign Direct Investment (FDI) in the past two years must submit an annual report on foreign liabilities and assets (FLA) to the Reserve Bank of India. Every year, the FLA return has to be emailed by July 15.
• The overseas JV/WOS’s viability;
• The contribution to international trade and benefits to India;
• The financial situation and business history of the Indian Party and the foreign entity;
• The Indian Party’s expertise and experience in the same or a closely related field as the JV/WOS.
3. Investments in energy and natural resources sectors exceeding the prescribed limit of financial commitment will be considered by the RBI. Applications must be forwarded by the AD Category-I – I bank as per the established procedure.
4. Proprietorship concerns, unregistered partnership firms, registered trusts, and societies engaged in manufacturing, education, or hospital sectors may make investments in a JV/WOS outside India with prior approval from the RBI. They must meet specific eligibility criteria and submit an application in Form ODI through the AD Category-I – I bank.
5. Through an AD Category-I bank, applications should be forwarded to the Chief General Manager of the Reserve Bank of India’s Foreign Exchange Department and Overseas Investment Division. Before sending the application, together with their feedback and ideas, for consideration, the bank must make certain that the terms and criteria are met.
Q.) What documents are required by banks for making ODI?
Q.) Can proprietorship firms and unregistered partnership firms make ODI under an automatic route?
No, proprietorship and unregistered partnership firms cannot make ODI under automatic route but Proprietorship concerns, unregistered partnership firms, registered trusts, and societies engaged in manufacturing, education, or hospital sectors may make investments in a JV/WOS outside India with prior approval from the RBI.
Q.) What is the difference between a joint venture and a wholly owned subsidiary in the context of ODI?
“Joint Venture (JV)” signifies a foreign body constituted, documented, or incorporated in compliance with the legislation and rules of the host nation wherein the Indian Party invests directly. Whereas “Wholly Owned Subsidiary (WOS)” represents a foreign entity created, registered, or incorporated following the laws and regulations of the host nation, with the Indian Party owning its full capital. So the main difference between the both is that in a Joint venture Indian party do not own 100% shares but in WOS Indian party owns 100% share.
Q.) What does Net Worth Include with context to Overseas Direct Investment (ODI)?
For companies, net worth consists of paid-up capital and free reserves and for partnership firms, it includes Partner’s capital.
Q.) What is the maximum permitted amount for making ODI under the automatic route?
The maximum permitted amount for Overseas Direct Investment (ODI) under the automatic route is up to 400% of the net worth of the Indian entity subject to the maximum amount of USD 1 billion.
Q.) Can we invest in installments for ODI?
No, for ODI investment should be made in a single shot but if it is written in the share sale/purchase agreement that the investment can be made in two or three tranches, then it can be made in installments provided that all installments are made within 180 days of making the first installment.
Q.) What is the time limit for submission of proof/share certificate after making an ODI?
Indian investors must receive share certificates or any other valid documentary evidence of investment in the foreign entity as an eligible form of proof. The time limit for submitting this proof to the bank is within six months from the date of remittance.
Q.) What is the highest amount that a person may invest abroad?
According to the LRS’s maximum authorized limit, a resident individual may invest up to USD 250 000 in the equity shares and mandatory convertible preferred shares of a joint venture (JV) or wholly owned subsidiary (WOS) outside of India.
Q.) Is hedging permitted for overseas direct investment?
Yes, Indian entities are permitted to hedge the risk arising out of currency fluctuation through forwards and options contracts.
Q.) What are the prohibited sectors where ODI is not permitted under automatic route?
Q.) What is the time limit for submission of the Annual Performance Report (APR)?
Indian entities that have made an overseas direct investment must submit an Annual Performance Report (APR) to the RBI, through their Authorized Dealer (AD) bank. The APR provides details about the financial performance of the overseas entity and should be submitted within 6 months from the end of each financial year of the overseas entity.
Q.) Should the Indian entity repatriate the profits and dividends earned from their Overseas Direct Investment?
For any query and plans related to ODI, you may contact IBRLive and obtain professional consultancy.
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