What is Overseas Direct Investments (ODI)
Overseas Direct Investments or “Direct investment outside India” means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity vide market purchase or private placement but shall not include portfolio investments.
WHAT ARE THE ROUTES/APPROACHES CAN A INDIAN RESIDENT MAKES INVESTMENT ABROAD
Residents of India are prohibited for making direct investment outside India save as otherwise the following routes
- AUTOMATIC ROUTE
- APPROVAL ROUTE
It is one of the most common routes for making direct investment outside India. In terms of Regulation 6 of the FEMA (Transfer or issue of any foreign security) Regulations 2004
An Indian Party may make direct investment/total financial commitment in Joint venture(JV) or Wholly Owned Subsidiary outside India (WOS) up to 400 percent of its net worth without any permission or approval from RBI.
The Indian Party should approach an Authorized Dealer Category-I bank with an application in relevant form and prescribe documents/enclosures for affecting the remittance towards the investments. Body created under an act of parliament or Partnership firm registered under Indian Partnership Act 1932 Limited Liability Partnership where more than one Indian party make an investment in the foreign entity, all such parties together shall constitute the Indian party. All Indian parties shall be taken on consolidation basis vis a vis with direct investment in foreign entity.
For purpose of determining the ceiling of 400% in all the JV/WOS shall compromise of the following:
- 100% of amount of equity shares
- 100% of compulsorily convertible preference shares
- 100% of other preference shares
- 100% of amount of loan
- 100% of amount of guarantee issued by Indian party to overseas entity
- 100% of the amount of bank guarantee backed by counter guarantee by Indian party
- 50% of amount of performance guarantee
The financial commitment can be made subject to the following conditions:
- The direct investment should be made in overseas JV/WOS engaged in bonafide activities (except real estate business, banking or business of providing financial services).
- The Indian Party must have submitted its Annual Performance Report in respect of all its overseas investments in Part III of Form ODI
- No guarantee should be open ended i.e. the amount of guarantee should be specified upfront.
- Indian Party should not be on RBI’s Exporters caution list/List of defaulters /CIBIL or under any investigation by enforcement agency or regulatory body.
- All transactions relating to JV/WOS will be routed through one branch of an authorized dealer.
Proposals not covered by the conditions under the Automatic route require prior approval of the Reserve Bank for which a specific application in Form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks. Some of the proposals which require prior approval are:
- Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet;
- Investments in Overseas Unincorporated entities in the oil sector by resident Corporate exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet provided the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment.