India’s economic growth has led to more Indian businesses expanding globally. The Foreign Exchange Management Act (FEMA) regulates these overseas investments. One key aspect of FEMA is Overseas Direct Investment (ODI) Rules and ODI Regulations, which allows Indian residents to invest in Foreign Companies. In this article, we will discuss the intricacies of ODI regulations and its implications on Indian investors.
Indian Resident Individuals (RI) or Indian Entity (IE) (Company/ Firm/ LLP) may decide to form a Company/ make Investment in Equity shares of Foreign Company. Such Foreign Company is known as Joint Venture – JV (in case of Partnership with Foreigner) OR Wholly Owned Subsidiary – WOS in case all Indian shareholders are holing 100% of the Equity. Such investment in JV or WOS needs to be reported to RBI via AD Banker (Authorized Dealer Bank).
Foreign Exchange Management Act (FEMA), 1999
Capital Account Transactions means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of person resident in India or assets or liabilities in India of person resident outside India.
Current Account Transactions means a transaction other than a capital account transaction and these are mainly related to current income or expenses of the Indian Residents.
One of the basic principle of FEMA which one has to keep in mind while doing any transactions, that what is not allowed to be done directly should also not be done indirectly either. Attempting to find indirect ways to do so would result in non-compliance with FEMA regulations and attract penal consequences.
i. For Resident Individual: Liberalized Remittance Scheme (LRS) is a framework established by the RBI that governs the remittance of funds by resident individuals for various purposes abroad and this also includes ODI.
ii. For Indian Entity: The Overseas Investment (OI) Rules in India were amended in August 2022 to improve the Overseas Investment Framework and expand opportunities for Indian entities. Hence, applicable rules and regulations needs to be adhered to while remittance by Individuals/ Company/ Firm/ LLP.
iii. Permissible limit of Investment under LRS: Under the LRS, all Resident Individuals (RI) including minors, are allowed to freely remit outside India up to USD 2,50,000 per financial year (April – March) for any permissible Current or Capital account transaction or a combination of both.
iv. Permissible limit of Investment by Company/ Firm/ LLP: The total financial commitment made by an Indian entity in all the foreign entities shall not exceed 400% of its net worth as on the date of the last audited balance sheet. Remittance exceeding such limit shall require prior approval from RBI.
v. Routes for Investment: There are 2 routes of investment available to Indians for ODI.
- Approval route
- Automatic Route.
vi. Prohibited Sectors for ODI:
ODI in a foreign entity which is engaged in below activities is prohibited–
- *real estate activity;
- gambling in any form; and
- dealing with financial products linked to the Indian rupee without specific approval of the Reserve Bank.
*real estate activity” means buying and selling of real estate or trading in Transferable Development Rights but does not include the development of townships, construction of residential or commercial premises, roads or bridges for selling or leasing.
vii. Modes of Investment in Foreign entity under ODI route:
- Acquisition of unlisted foreign equity;
- Subscription to foreign Memorandum of Association;
- More than 10% equity in listed foreign company;
- Investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity;
- Acquisition through bidding/tender and Rights issue/bonus shares;
- Capitalization of dues;
- Swap of securities and Gift/inheritance;
- Acquisition through Sweat equity/ESOP/employee benefits;
- Merger, demerger, amalgamation or any scheme of arrangement.
viii. Documentation and Reporting by the remitter from India:
- The Form FC (Section A to Section E) is required to be submitted to the designated AD bank by Individual investor seeking to invest in the foreign entity, whether under Automatic Route or Approval Route.
- Due date: The Form FC is to be submitted while undertaking financial commitment in a foreign entity, at the time of sending outward remittance or making a financial commitment, whichever is earlier. In other words, subscription to Memorandum of the Foreign Company shall be termed as making a Financial Commitment. Hence, in order to avoid the Late Submission Fees (LSF), it is crucial to submit all the details and Form FC with AD Bank before the Foreign Entity gets incorporated.
- Other documents such as Form A2, Clean outward remittance etc. are submitted with Form FC to process for remittance. The document requirements vary from bank to bank and hence investor needs to first consult with the Bank for documentation.
- Valuation report: In case of subsequent investment in share capital of foreign company, valuation report is required from Chartered Accountant or Merchant Banker in support of investment. However, for initial subscription to the MOA of Foreign Company, there is no such requirement of Valuation Report.
- Deferred Payment: This agreement is required when an investor invests in a foreign company as per new OI regulations.
ix. Post completion of ODI process:
- Submit Share Certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months (180 days) from the date of effecting remittance with the AD Bank
- Submit every year on or before December 31, an Annual Performance Report (APR) in form in respect of each JV or WOS outside India. As per practical observation, APR should be filed before November 30 to avoid last minute delay caused by Banks.
- Audit of Foreign Entity’s Books: For submission of APR, it is mandatorily required that books of the Foreign Entity be audited by Foreign CPA/ Indian CA as per requirement of RBI. Some banks allow the Indian CA to audit while some banks mandatorily require foreign CPA to audit the books.
- Foreign Liabilities and Assets return (FLA): It is required to be submitted by all the Indian Entities (other than RI) which has received FDI and/or made ODI abroad in the previous financial year by July 15 every year on RBI FLAIR website.
x. Repatriation:
Indian Investor with ODI in a foreign entity shall realize and repatriate to India:-
- Any money owed by the foreign company.
- Consideration to be received from transfer of shares or disinvestment of ODI.
- Consideration to be received in case of liquidation of the foreign company
Timeline: Within 90 days from the date when such receivables fall due or the date of such transfer or disinvestment or the date of the actual distribution of assets made by the official liquidator.
xi. Other points:
- In case of specific events such as change in shareholding pattern, disinvestment in ODI, transfer of shares of Foreign company, applicable reporting needs to be done with AD bank within due date.
- There are some cases where form APR is not required.
- In case of acquisition of Step Down Subsidiary (SDS), applicable FEMA guidelines and reporting needs to be adhered to.
We hope that this Article has provided you some insights on the ODI process. Feel free to get in touch in case of any queries.
