Overseas Direct Investment (ODI)

Overseas Direct Investment (ODI)

Foreign direct investments are investments made in Indian organizations for improved returns by foreigner nationals. Any Indian person or organization can invest funds in foreign countries via direct means. These are however, subject to Indian Taxation laws.

These ODI opportunities are great avenues for Indian entities to diversify and grow their companies in foreign countries. They can take the form of joint ventures (JV), wholly owned subsidiaries (WOS), share acquisitions, etc. Portfolio investments however, do not fall under the ODI umbrella.

Rules regarding ODI
The complete set of guidelines for ODI is provided by Reserve Bank of India (RBI) and can be found under notification number Foreign Exchange Management Act (FEMA) 120 / RB – 2004. Simply put, there are two ways an Indian organization can avail the benefits of an ODI:

  • Automatic route: Any Indian organization using this avenue of overseas investment does not need any prior approval from the governing body of ODI’s i.e., RBI. They can make the investment as joint ventures or wholly owned subsidiary.
  • Approval route: This channel of investment can be chosen when the conditions of the automatic route are not met. Under this rule, the authorised dealer bank will submit the ODI Form along with required documents and get approval from the RBI.

Restrictions in currency
There are certain currency restrictions in place when making such ODI’s. These include the following:

  • Investments in Pakistan can only be made through the Approval Route.
  • Investments in Bhutan can be made in Indian rupees and other convertible currencies.
  • Investments in Nepal can only be made in Indian rupees.

ODI transactions requiring RBI approval
Prior approval of RBI is required in the following cases:

  1. Overseas investments in the sectors of energy and natural resources exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet;
  2. Investments in overseas unincorporated entities in the oil sector by resident corporates exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet;
  3. Overseas investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria;
  4. Investments by registered trusts / societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India;
  5. Corporate guarantee by the Indian party to second and subsequent level of step down subsidiary (SDS);
  6. All other forms of guarantee which is offered by the Indian party to its first and subsequent level of SDS;
  7. Restructuring of the balance sheet of JV / WOS involving write-off of capital and receivables in the books of listed / unlisted Indian company satisfying certain eligibility criteria mentioned under Regulation 16A of notification ibid;
  8. Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization; and
  9. Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by RBI under the approval route based on the business requirement of the Indian Party and legal requirement of the host country in which JV / WOS is located.

Initiative
Indian Government is making grand efforts to combine the domestic and global economies. According to the most recent reports from the UK, India is their third largest foreign Investor. In 2017, the total ODI by India includes USD 1,341 million in the United States of America, USD 657 million in Singapore and USD 554 million in Mauritius.

Latest developments and benefits
Few benefits of such investments are gaining a global platform, expanding international market reach, access to the latest technological trends, acquiring worldwide customer base and establishment of a brand identity among a global audience.

Further updates and rules for cross-border transactions can be obtained from the Master Circulars disbursed by the Reserve Bank of India in conjunction with FEMA Act. These are kept up-to-date and amended as and when there are any modifications to the guidelines

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Source: https://www.rbi.org.in/