Handy Compliance for Overseas Direct Investment in India

Overseas Direct Investment (ODI) is a type of investment that is made outside the Indian Territory by Indian companies with foreign entities. It stands for Overseas Direct Investment in India. We can do ODI through various ways for example, by contributing to the capital or subscription into a foreign entity. We can also purchase the shares of a foreign entity and we can also market purchase or with the help of stock exchange. Now, let us discuss about the Overseas Direct Investment in India.

Origin of ODI

As per RBI under “Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, any resident of India may make investment outside the country or can make foreign exchange denominated financial commitments or Overseas Direct Investment in India with any Joint Ventures(JV’s) or wholly-owned subsidiaries(WOS) in the world.

Definitions of Some Important Terms used with Overseas Direct Investment in India-

• Authorized Dealer(AD) Bank: Authorized Dealers is a person who is from RBI who is responsible for making ODI. In addition, it is mandatory for the Indian party to send all the transactions with respect to particular Overseas JV/WOS only through a branch of AD. AD will report all the communications and transactions related to investments. Indian Party can replace AD after submitting an application to the RBI and after obtaining NOC from the existing Authorized Dealer. Forms– There are three types of forms for Overseas Direct Investment in India, these are-
  • ODI Part I form making Overseas Direct Investment
  • Part II ODI Form for filing of Annual Performance Report(required by RBI)
  • ODI Form Part III required for Disinvestment

• Indian Party: Indian Party consists of any Indian company, Partnership Firm, Registered LLP.

• Joint Venture/wholly-owned subsidiary: It represents any foreign entity outside India that has registration according to the law of the Host nation in which direct investment has been made by the Indian Party.

• Overseas Direct Investment(ODI): Indian parties may invest outside the country through either Automatic Route or the Approval route , by the way of purchasing of any shares or by subscribing to the memorandum of a foreign entity, by contributing to the capital and by private placement for the long term interest in the foreign entity.

This is Overseas Direct Investment.

The Procedure established by statute for making Overseas Direct Investment in India

Indian Parties can make ODI by these routes

Automatic Route:

• Overseas Direct Investment by Automatic Route-

Under this route, Indian Party does not need any approval beforehand from Reserve Bank for making Overseas Direct Investment in any JV or WOS situated abroad.

It is mandatory for the Indian party to follow the below-mentioned procedure for ODI in  Joint Venture / wholly-owned Subsidiary: 

• Indian party should file ODI form Part I and should get it certified from Statutory Auditor. 
• In case of RI, certificate from Statutory Auditor is not require.
• Valuation report is not require for ODI in new JV/WOS.
• Form A2 has to submit to respective AD Bank with above mentioned ODI form
• Part I contains details of JV/WOS , Indian Parties and remittance with commitment related to finance of overseas entity and has to be submit at the time of remittance
• In order to report the remittance for supplementary investment and any form of financial commitment.

Financial commitments under automatic and approval route have to be only after receiving the receipt of an auto-generated e-mail from RBI after RBI has confirmed it to the UIN.

All the valuation is done by Category I Merchant Banker who is registered with SEBI or by Merchant Banker registered with host nation or by certified public Accountant for the investment above 5 million US Doller or by way of swapping of shares.

Approval Route:

• Overseas Direct Investment by Approval Route- Any Indian Party who intends to make ODI can approach Authorised dealer with the proposal, submitted to Reserve bank along with specific recommendations of the Authorised Dealer Bank with Supporting Documents. AD of the Indian Party has to submit ODI Form Part I with some documents in a sealed cover letter for approval from the Reserve Bank. 
• Documents required for Overseas Direct Investment in India under Approval Route-
  • Transaction number generated through OID application
  • Details of Indian Party
  • Details of Overseas Party
  • Background for the Proposal
  • Transactional details
  • Reason for seeking approval with mentioning the extant provisions of FEMA
  • Observations of the designed Authorised dealer Bank  for the following purpose:
  • Viability of the Joint Venture/ wholly-owned subsidiary outside the country at first instance.
  • Contributions which are made to external trade and all the other benefits which are supposed to accrue to India by such investment.
  • Financial positions and Business track record of both the Indian party and foreign entity
  • Indian Party’s experience and expertise in the field of same or line of activity related to same business venture outside the country
  • Last but not the least, recommendations of the Authorised dealer Bank.

Also, a letter addressed to AD bank from the Indian party, with a Diagrammatic representation of the organizational structure containing all the subsidiaries of the Indian party with their stakes and status.

Another important requirement is an Incorporation certificate with a valuation certificate for the overseas entity to be submitted.

Indian Party has to submit documents with proper numbers, indexes, etc.

Compliances for Overseas Direct Investment in India

Compliances for Overseas Direct Investment in India can be divided into two parts:

• Pre Compliance/ At the time of investment: Indian party must file the ODI form within 30 days of effecting investment.

• Post Investment Compliance: Under these compliances Indian party must undertake the following points and Indian Party should:

• share the certificate or any documentary evidence of investment within Overseas Joint Venture/ wholly-owned subsidiary and should submit the same to AD within Six Months
• Come back to India with, all dues receivable from the overseas Joint Venture/wholly-owned subsidised.
• Filing of APR under Part II of Form ODI with respect to each JV or WOS outside the country or earned by Indian Party till 31 December each year  
• Report the information of the decision taken by joint venture/ wholly-owned subsidiary regarding any diversification of its activities or change in its shareholding pattern within a month.
• The Indian Party has to file Foreign Liabilities and Assets with RBI even though APR has been filed.

Prohibited Areas where Indian Party cannot make Overseas Direct Investment

There are some areas where any Indian Party is not permitted to make overseas direct investment outside the country.

Areas are mentioned below:

• Real Estate- It means that Indian Parties cannot invest in any Real Estate business outside the country.
• Banking Business
• Indian Parties are not allowed to deal with financial products which are linked to Indian Rupees without approval of Reserve Bank of India.

Takeaway

The globalization phenomenon is sky-rocketing every day. The Indian parties must remember the compliance for Overseas Direct Investment in India for avoiding legal issues. Moreover, some keynotes have to keep in mind before investing outside the country. Indian Parties should take some to check the efficiency of foreign entities before making the move.