Overseas Direct Investment
Frequently Asked Questions
What is Overseas Direct Investment (ODI)?
ODI means (i) acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity, or (ii) investment in 10% or more of the paid-up equity capital of a listed foreign entity, or (iii) investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity.
Explanation: Once an investment in a foreign entity is classified as ODI, the investment shall continue to be treated as ODI even if such investment falls below 10% of the paid-up equity capital or the investor loses control in the foreign entity.
What is Overseas Portfolio Investment (OPI)?
OPI means investment, other than ODI, in foreign securities. The following is further provided:
OPI shall not be made in:
• any unlisted debt instruments; or
• any security which is issued by a person resident in India who is not in an IFSC; or
• any derivatives unless otherwise permitted by Reserve Bank; or
• any commodities including Bullion Depository Receipts (BDRs).
How can an Indian Party make direct investment outside India?
An Indian Party can make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. The conditions for making such investment are as under:
(i) The total financial commitment of the Indian Party in Joint Ventures / Wholly Owned Subsidiaries shall not exceed 100%, or as decided by the Reserve Bank from time to time, of the net worth of the Indian Party as on the date of the last audited balance sheet;
(ii) The direct investment should be made in an overseas JV or WOS engaged in a bonafide business activity;
(iii) The Indian Party should not be on the Reserve Bank’s Exporters caution list /list of defaulters to the banking system circulated by the Reserve Bank or under investigation by any investigation /enforcement agency or regulatory body;
(iv) The Indian Party must have submitted its Annual Performance Report in respect of all its overseas investments in the format given in Part III of the Form ODI;
(v) The Indian Party must route all transactions relating to the investment in a Joint Venture/Wholly Owned Subsidiary through only one branch of an authorised dealer to be designated by it.
(vi) the Indian Party must submit Part I of the Form ODI, duly completed, to the designated branch of an authorised dealer
What are the limits of ODI?
The ‘net worth’ should be as per the last audited balance sheet of the Indian Party.
What is the meaning of ‘financial commitment’/ what constitutes ‘financial commitment’ in the context of overseas investment?
What should be reckoned under ‘Total Financial Commitment’ by an Indian Party?
For the purpose of determining ‘Total Financial Commitment’ within the said limit of net worth, the following should be considered –
a. Remittance by market purchases, namely in freely convertible currencies; in case of Bhutan, investment made in freely convertible currencies or equivalent Indian Rupees, in case of Nepal, investment made only in Indian Rupees;
b. Capitalization of export proceeds and other dues and entitlements;
c. 100% of the value of guarantees issued by the Indian party to on or behalf of the overseas JV/WOS;
d. Investment in agricultural operations through overseas offices or directly;
e. External Commercial Borrowing in conformity with other parameters of the ECB guidelines;
f. 50% of the value of performance guarantee issued by the Indian party to or on behalf of the overseas JV/WOS. In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 100% of the net worth of the Indian party, the Indian party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.
g. 100% of the value of the bank guarantee(s) issued by a resident bank on behalf of an overseas JV/WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party.
What are the various sources of funding ODI?
Indian Parties may invest out of one or more of the following sources –
i. Out of balance held in the Exchange Earners Foreign Currency account of the Indian Party maintained with the Authorised Dealer. Provided that the ceiling of 100% of net worth shall not apply where the investment is made out of balances held in its EEFC account, maintained in accordance with the aforesaid regulations.
ii. Drawal of foreign exchange from an authorised dealer in India which shall not exceed 100% of
Can the net worth of subsidiary/holding company of the Indian party be utilized for investing in a JV/WOS abroad?
What are the various filing requirements in ODI under Automatic route?
The person intending to make any financial commitment shall fill up the Form FC duly supported by the requisite documents and approach the designated AD bank for making the investment/remittance.
Annual Return on Foreign Liabilities and Assets – All the Indian Parties having ODI have to file the FLA return every year by July 15.
What are the various filing requirements in ODI under Automatic route?
• Background and brief details of the transaction.
• Reason(s) for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the following:
o Prima facie viability of the foreign entity;
o Benefits which may accrue to India through such investment;
o Financial position and business track record of the Indian entity and the foreign entity;
o Any other material observation.
• Recommendations of the designated AD bank with confirmation that the applicant’s board resolution or resolution from an equivalent body, as applicable, for the proposed transaction(s) is in place.
• Diagrammatic representation of the organisational structure indicating all the subsidiaries of the Indian entity horizontally and vertically with their stake (direct and indirect) and status (whether operating company or SPV).
• Valuation certificate for the foreign entity (if applicable).
• Other relevant documents properly numbered, indexed and flagged.
Can Indian Parties invest through special purpose vehicles (SPV)?
Can Indian Parties set up step-down overseas subsidiaries under the Automatic route?
What is the maximum amount of ODI beyond which approval from the Reserve Bank required?
Is an Indian company permitted to acquire equity in an overseas company by way of Rights issue and bonus shares and what are the reporting requirements?
(1) A person resident in India, who has acquired and continues to hold equity capital in a foreign entity in accordance with the OI Rules/Regulations may acquire equity capital through exercise of rights or by way of bonus shares
(2) The acquisition of equity capital through exercise of such rights shall be reported in Form FC. Where such person does not exercise the rights but renounces such rights in favour of a person resident in India or a person resident outside India, such renouncement shall not require reporting. Further, the acquisition of bonus shares shall not be treated as fresh financial commitment and will not require reporting.