Direct investment outside India means investments by way of:
- contribution to the capital or subscription to the MoA of a foreign entity or
- by way of purchase of existing shares of a foreign entity either by market purchase or by private placement or through stock exchange,
- excludes Portfolio investments.
Ways for Investment outside India:
- General Permission
- Automatic Route
- RBI Approval Route
1. General Permission:
General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:
- a) Out of funds held in the RFC account;
- b) As bonus shares on existing holding of foreign currency shares;
- c) When not permanently resident in India, from the foreign currency resources outside India.
General permission is also available to sell the shares so purchased or acquired.
2. Automatic Route:
Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad. The Indian Party should approach an Authorized Dealer Category – I bank for effecting the remittances towards such investments.
However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.
Indian Party may make investments in a Joint Venture / Wholly Owned Subsidiary (JV /WOS) abroad under the Automatic Route. “Indian Party” (‘IP’) includes any of the following:
- A company incorporated in India
- A body created under an Act of Parliament
- A partnership firm registered under the Indian Partnership Act, 1932
- A limited liability partnership incorporated under the Limited Liability Partnership Act, 2008
It should be noted that individuals are not allowed to invest under the Automatic Route.
Limits under the Automatic Route:
- The Indian Party can invest up to 400% of its net worth (as per the last audited Balance Sheet) in JV / WOS
- EEFC A/C
- ADR/GDR Proceeds.
In case the financial commitment in any financial year is above USD 1 billion, prior approval of Reserve Bank will be required.
It should be noted that prescribed limit of 400% of Net worth will not be applicable where the investment is made out of balances held in the EEFC account or out of funds raised through ADRs/GDRs;
Pre-Conditions for ODI:
- JV/WOS in bona-fide business activity.
- IP shall not on RBI’s caution/ defaulter list or under investigation
- All transactions relating to Investment to be routed through same AD Bank
- JV/WOS should be set up in countries not regarded as ‘non-cooperative countries and territories’ by FATF.
Other Relevant Points:
The Indian Party may extend loan / guarantee only to an overseas JV/ WOS in which it has equity participation. However, Proposals from the Indian Party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route.
Indian entities may offer any form of guarantee – corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:
- All financial commitments including all forms of guarantees and creation of charge are within the overall ceiling prescribed for overseas investment by the IP i.e. within 400 % of the net worth as on the date of the last audited balance sheet of the IP.
- No guarantee should be ‘open ended’.
- In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400 % of the net worth of the IP, the IP shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.
- Investment in Pakistan is allowed under the approval route. Investments in Nepal can be only in Indian Rupees. Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies.
Valuation requirement for ODI in existing entity
Investment more than USD 5 million:
- By SEBI registered Cat I Merchant Banker; or
- Investment Banker/ Merchant Banker registered outside India
In case of investment by way of swap of shares, above said limit is not applicable.
In all other cases
- Chartered Accountant; or
- Certified Public Accountant
Procedure to be followed by an Indian party to make overseas direct investment in a JV/WOS under the Automatic Route:
IP is required to fill form ODI duly supported by the documents:
- Board Resolution,
- Statutory Auditors certificate and
- Valuation report (in case of acquisition of an existing company)
and approach an AD Category-1 Banks for making the investment/remittance.
3. RBI approval route:
Prior approval of the Reserve Bank is required in all other cases (except the ones covered above) of direct investment abroad. For this purpose, application together with necessary documents has to be submitted in Form ODI through a AD Category-1 bank.
Obligations of Indian Party:
An Indian Party which has made direct investment abroad (whether under LRS or automatic route or approval route) is under obligation to:
- Receive share certificate/ proof of investment Within 6 months, or such further period as RBI may permit
- Repatriate to India the dues receivable from foreign entity within 60 days of its falling due, or such further period as RBI may permit
- Submit Annual Performance Report in Part II of Form ODI to the Reserve Bank through the Bank handling the transfer of funds every year on or before 31st
For individuals making overseas investment through LRS, the reporting requirements are as follows:
- Submit Part I of Form ODI to the bank within 30 days of making the remittance.
- The Bank shall report the particulars of remittance to Reserve Bank of India in Part I and II of Form ODI within 30 days of making the remittance.
- The particulars of disinvestment (if any) shall also be reported to the Bank in Part III of the Form ODI within 30 days of the receipt of the disinvestment proceeds.
Disclaimer: This Article is strictly for information only. While all efforts have been made to ensure accuracy and correctness of information provided, no warranties / assurances are provided or implied. Readers of this article are expected to refer to the relevant existing provisions of applicable laws and advised to consult a Company Secretary / Chartered Accountant / Legal Professional before taking any business decisions.
Readers of this article agrees that the information is not professional advice and is subject to change without notice. Author does not accept any liability, either direct or indirect, with regard to any damages / consequences / results arising due to use of the information contained in this article.