This article is written by Sharad Yadav from the Institute of Law, Nirma University. This article gives information about who is eligible for doing an investment outside India and what is the requirement which needs to fulfil before and after making the investment.

Introduction

Overseas Direct Investment means investment done outside India by an Indian either under the automatic route or the approval route or by subscription to the memorandum of a foreign entity or by way of contribution to the capital either by the stock exchange or private placement, by setting up Joint Venture (JV) or a Wholly Owned Subsidiary (WOS).

Overview

There is certain eligibility that is required by the person to invest outside India.

Resident individual

A Person has to be residing in India for more than one hundred eighty-two days during the course of the preceding financial year but the person is not eligible:

1. If the person goes outside India for taking up the job/employment there.
2. For some other purpose which shows its intention to stay outside Indian territory for an uncertain period.

Indian party

It means that:

1. A company which came into the picture by the Act of the parliament.
2. A partnership firm that is registered under the Partnership Act,1932.
3. A limited liability partnership.
4. Any other body is notified by the Reserve Bank Of India.

There are two methods for investment:

1. Automatic route (No permission needed from RBI).
2. Approval route (Permission needed from RBI).

A simple definition of Joint Venture(JV) and Wholly Owned Subsidiary(WOS) which are going to come again and again:

Joint venture

A foreign entity is called JV of the Indian party when other foreign promoters are present who hold the stake along with the Indian party.

Wholly Owned Subsidiary

In the case of wholly-owned subsidiaries, the entire capital is held by one or more Indian parties.

Criteria for ODI under automatic route

There is no prior registration required to make Overseas Direct Investment under the automatic route. After the report of the first remittance, a unique identification number is generated instantaneously. After getting the allotment of UIN investment in Joint Venture or Wholly-Owned Subsidiary. There is a certain condition which is given below for ODI under the automatic route.

Eligibility to make an overseas direct investment under automatic route

An Indian party is completely eligible to make an overseas direct investment under the automatic route. Here Indian party is referring to the company which is incorporated in India or which is established by the Act of the parliament or partnership firm which is registered under Indian Partnership Act,1932 or Limited liability partnership (LLP) incorporated under LLP Act, 2008 and it can be any organization which is notified by the Reserve Bank of India. Even if more than one such company or a body invests in the foreign Joint Venture/Wholly Owned Subsidiary then such type of combination will be counted as “Indian Party”.

Limits and requirements for an Overseas Direct Investment route

• Indian parties which want to invest can do so up to the prescribed limit of its net worth which will be according to the last audited balance sheet for the activity which is lawful in the host country.
• The Indian party can not invest in a foreign country if the company is under the caution list/defaulter list of the Reserve bank or if the company is under investigation by the Director of enforcement or any regulatory authority.
• All the transactions by the Indian party which is relating to the investment in the Joint venture/wholly-owned subsidiary will be through only one branch of an authorised dealer which is authorised by the Indian party.

Restriction regarding country and currency

There is a certain restriction put on investment in Pakistan. Investment in Pakistan is allowed under the approval route. The company has to take permission for doing the investment there. Investment in Nepal can be done only in India rupees. Similarly, investment in Bhutan is allowed in Indian rupees and freely convertible currencies.

Financial commitment

Financial commitment refers to the amount of direct investment outside Indian territory by an India party:

1. By providing loans to the JV/WOS in a foreign territory.
2. Performance guarantee issue on the behalf of JV/WOS by 50% of the amount.
3. Corporate guarantee issue on the behalf of JV/WOS by 100% of the amount.
4. By contributing to the JV/WOS as preference shares.
5. By contributing to equity shares of JV/WOS in foreign territory.
6. Amount of non-fund/fund based on the credit facility availed by the creation of charge on the movable or immovable property or any other financial assets of the Indian party.

The requirement of RBI approval

In an approval method applicant approaches the Authorized Dealer (AD) with the form of ODI with all the relevant documents which all then submitted to the Reserve Bank Of India after which UNI is given by the RBI. Allotment of UIN doesn’t mean approval from the Reserve Bank Of India for the investment which will be made in the JV/WOS. Given the UIN only taking on record of the investment for maintaining the database. The onus of complying with the provisions of (Foreign Exchange Management Act) FEMA regulations rests with the Authorized Dealer bank and the Indian party.

RBI takes certain condition into consideration before approval, some of them are given below:

1. The financial position of the Indian party as well as a foreign entity.
2. Viability of joint venture/wholly-owned subsidiary of a foreign entity.
3. Experience of the Indian party in that venture.

If any financial commitment is exceeding USD 1 Billion in the financial year then they have to take prior approval from the Reserve bank of India even when the entity is eligible under the automatic route.

Indian parties need approval in certain areas where they can not invest without prior approval from the Reserve Bank Of India. They are prohibited from making the investment in the foreign entity related to the banking sector and real estate. Real estate means selling and buying of real estate or trading in Transferable Development Rights (TDRs) but that does not include the development of townships, construction of residential premises, roads or bridges etc.

Investment in Pakistan is permissible through only approval route without approval nobody can invest in Pakistan. Even Indian parties are not allowed to overseas investment where countries are listed in the Financial Action Task Force as a “Non-co-operative countries and territories”.

Non requirement of RBI approval

Under the automatic route, Indian party does not require any permission from the Reserve Bank Of India for doing any Overseas Direct Investment in the Joint venture/Wholly owned subsidiary in the foreign entity. However, they have to take the UNI number for doing investment. Under the automatic route, an Indian party can make overseas investment in equity shares and compulsorily convertible preference shares outside India without approval but there is certain restriction are there such as:

1. Indian parties should be engaged in lawful and bonafide business activity in the foreign entity.
2. They are not on the caution or default list of the Reserve Bank of India or any investigation agency.
3. They can extend a loan but that should be by the way of contribution to the equity capital of JV/WOS.
4. Valuation of the shares of the organization should be done by a registered Chartered Accountant or a Certified Public Accountant.

Source of funding

Funding for ODI can be done by one or more sources which are given below:

1. By capitalization of the exports.
2. By proceeds of external commercial borrowings/foreign currency convertible bonds.
3. In exchange of GDRs/ADRs which are issued according to scheme for the issue of foreign currency convertible bonds and ordinary shares and the guidelines issued by the government of India in the matter. 
4. By drawal of foreign exchange from AD bank in India.
5. By swapping the shares.
6. By foreign currency raised through ADR/GDR issues.

In respect of subsequent investment

• First of all reporting to the authorized dealer bank by giving Part I of the form Overseas Direct Investment within the 30 days of the day along with all the documents which are required for the same.
• Indian Party will fill the UNI no. which is allotted by the RBI in Part I Of Overseas Direct Investment(ODI).
• Every ODI form should be submitted to the AD bank by going to them physically.

• Description of Part I of the Form ODI is given below:
  • Section (A)- All details of the Indian party/resident individual
  • Section (B)-  Structure of the capital and all other detail of JV/WOS 
  • Section (C)- Details of remittance/transactions/financial commitment
  • Section (D)- Declaration
  • Section (E)- Self-certification and certificate by the statutory auditors

Reporting requirements

There is a certain obligation that has to be followed by the Indian entities as well as individuals who make an investment. An annual report should be made by the entity or individual which includes the annual performance report to be filed before 31st December of every year and an annual return to be filled online by the companies which have made the FDI in the foreign country or receive any FDI by the 15th of July of every year.

Entity or individual has to submit a share certificate or any other document as evidence which shows investment in a foreign entity within six month from the date of effecting remittance or which the amount to be capitalized became due to the entity or the date on which the capitalized amount is allowed. If the entity or individual is altered shareholder pattern or diversifies its activities then he has to report to the Reserve Bank of India through AD within 30 days of the decision.

Disinvestment by the Indian party

Disinvest with write-off

Indian party can disinvest with write-off but there is also certain condition are there such as:

•  If the joint venture/Wholly owned subsidiary is listed in the overseas stock exchange.
• If the Indian party is listed in the Indian stock exchange and not having a net worth below 100 cr.
• If it is not listed in the stock exchange but investment overseas did not exceed USD 10 million.
• If the Indian party is a listed company having net worth lease than 100 cr but Joint venture/Wholly Owned Subsidiary did not exceed USD 10 million.
• Indian parties can disinvest from JV/WOS with and without write off.

Disinvest without write-off

Indian party can disinvest without write-off but the are certain condition are there such as:

• Indian parties should not be under the investigation of any regulatory authority of India such as IRDA, SEBI, CBI etc.
• Overseas concern has been operating for at least 1 year and its Audited account and annual performance report submitted to the Reserve Bank Of India.
• The sale is effected through a stock exchange where the shares of the overseas Joint Venture/ Wholly Owned Subsidiary are listed.
• Indian party not having any outstanding dues by way of royalty, dividend, consultancy commission or any other export proceeds from the Joint Venture/Wholly Owned Subsidiary.

Overseas Direct Investment by registered trust and societies

Registered trusts and societies are also allowed to make an investment in a Joint Venture /Wholly Owned Subsidiary but they have to take prior permission from the Reserve Bank of India. They should meet the criteria which are laid down in the RBI regulations. Registered trust and societies are not allowed to do the investment through an automatic route. 

Conclusion

Overseas direct investment benefits both the company as well as the country in which the company is going to invest. It is very significant for developing economics and new emerging market players. By investing in other country companies, they expand their international sales. Investment increases the opportunity and wages which is a crucial aspect for any country. Many countries are now encouraging such investment because it helps in the growth of the country. Hence, Overseas Direct Investment is now playing a major role in changing the world.

References

• https://m.rbi.org.in/Scripts/FAQView.aspx?Id=32
• https://taxguru.in/rbi/brief-insight-overseas-direct-investment-odi.html

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