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Overseas Direct Investment (ODI)

Feb 20, 2019 | Blog, FEMA

Introduction
1. Overseas investments (or financial commitment) in :
• Joint Venture (JV) &
• Wholly Owned Subsidiaries (WOS) have been recognized as important avenues for promoting global business by Indian entrepreneurs.

2. Joint ventures are perceived as amedium of:
• economic &
• business co-operation betweenIndia and other countries.

3. Transfer of :
• Technology & skill
• Sharing of results of R&D
• Access to wider global market
• Promotion of brand image
• Generation of employment &
• Utilization of raw materials available in India & in the host country are other significant benefits arising out of such overseas
investments (or financial commitment).

4. They are also important drivers of foreign trade through increased exports of plant & machinery and goods & services from India and also a source of foreign exchange earnings by way of:
• Dividend earnings, royalty, technical know-how fee and other entitlements on such investments (or financial commitment).

Important Definitions
Direct Investments Outside India
• Investment by way of contribution to the capital of a foreign entity ; or
• Subscription to the Memorandum of Association of a foreign entity; or
• By way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but
• Does not include portfolio investment

Joint Venture (JV)
Means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party(IP) makes a direct investment

Wholly Owned Subsidiary (WOS)
Means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country,
whose entire capital is held by the Indian party.

Indian Party
• Indian Company
• Registered Partnership Firm
• Registered LLP
Provided that : Where more than one such entities make an investment in foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.

Net Worth
• For calculation of Net worth (Paid-up capital plus free reserves) of the Indian party, following to be considered:
o Net worth of the Indian Investing company (say A Ltd).
o Net worth of the Indian Holding company of A Ltd (which holds at least 51% stake of A Ltd.).
o Net worth of the Indian Subsidiary Company of A Ltd (in which A Ltd holds at least 51%).
• The above facility is not available to partnership firms. Also partnership firms net worth cannot be taken into account by an incorporated entity.
• The holding or subsidiary company furnishes letter of disclaimer in favour of the Indian Party.

Restrictions
1. Investment cannot be in a foreign entity engaged in real estate business# or banking business, without prior approval of RBI
2. An overseas entity, having direct or indirect equity participation by an Indian Party
• Shall not offer financial products linked to Indian Rupee without specific approval of the Reserve Bank
3. The Indian Party should not be:
• Under investigation by any investigation / enforcement agency or regulatory body*
• On Reserve Banks’s Exporter’s caution list; or
• On list of defaulters to the banking system circulated by the Reserve Bank, Credit Information Bureau (India) Ltd. (CIBIL) or any other credit information company; or

#Real Estate meaning buying & selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential / commercial premises, roads or bridges.

*UIN not issued unless investigation is completed .

4. Investments not permitted in countries identified by Financial Action Task Force (FATF) as noncooperative countries as “call for
action” and territories or countries notified by RBI {inserted vide A.P. (DIR Series) Circular No. 28 dated January 25th , 2017}
• Iran and North Korea (Call for Action)
5. Investments in :
• Pakistan only through approval route
• Nepal only in Indian Rupees
• Bhutan in Indian Rupees and freely convertible currencies

How to make investment?
1. Indian Party to approach AD Bank with FORM ODI. All transactions relating to a JV / WOS should be routed through one branch of an AD (Authorised Dealer) Bank
2. To check if all prior FEMA compliance for Indian Party should have been completed (filing of APR forms for other JV/WOS required
too).
3. AD may ask for details of investment abroad such as :
 If not through Special Purpose Vehicle (SPV)
Project Report / Feasibility Study Overseas Direct Investment

 If through SPV
Project Report / Feasibility Study Details of Underlying investment

4. Investments through SPV shall allowed under Automatic Route :
• All conditions applicable for direct investment apply also to investments through SPV
• Underlying investments through SPV to be reported to RBI through AD Bank

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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