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Overseas Direct Investment (ODI) and Compliances

Overseas Direct Investment (ODI) and Compliances

Overseas Direct Investment (ODI) and Compliances

By- Mala Mahto (CS, LLB)

What is ODI?

Investment outside the territory of the Country by way of Contribution to capital, Subscription to Memorandum of foreign entity and Acquisition of shares by way of market purchase, private placement or through the stock exchange in a joint venture (JV) or wholly owned subsidiaries (WOS) is termed as Overseas Direct Investment (ODI).

As per Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (“Notification”) issued by the Reserve Bank of India (“RBI”), Indian residents may make foreign exchange denominated overseas direct investments or financial commitments (“ODIs” or FCs”) into joint ventures (“JVs”) and/or wholly-owned subsidiaries (“WOSs”) situated outside India. The Notification also governs the ODIs by a resident into shares and securities of entities incorporated overseas. Based on the aforesaid Notification, the RBI further issued the Master Direction dated January 1, 2016, which consolidates all the instructions issued by RBI relating to ODIs by residents in such JVs / WOSs situated outside India. (“Directions”).

Joint venture: A foreign entity is termed as JV of the Indian Party when there are other foreign promoters holding the stake along with the Indian Party.

Wholly owned Subsidiary:  In case of WOS entire capital is held by the one or more Indian Parties.

ODI under automatic route

An Indian party (Indian party includes companies, partnership firms, limited liability partnerships and any bodies created by an Act of Parliament) is permitted to make ODIs in foreign exchange in overseas JV / WOS under the automatic route, not exceeding 400% (Four Hundred percent) of the net worth as on the date of last audited balance sheet of the Indian party.

The total ODI of the Indian party in all the JVs / WOSs shall comprise of the following:

(a) 100% of the number of equity shares and/or compulsorily convertible preference shares (“CCPS”);

(b) 100% of the number of other preference shares;

(c) 100% of the amount of loan;

(d) 100% of the amount of guarantee (other than performance guarantee) issued  by the Indian party;

(e) 100% of the amount of bank guarantee issued by a resident bank on behalf of JV / WOS of the Indian party provided the bank guarantee is backed by collateral; 

(f)  50% of the amount of performance guarantee in case if the outflow results in a breach of the ODI limit in force, prior permission of the RBI should be obtained before executing remittance beyond the limit prescribed for the ODI.

As per A.P. (DIR Series) Circular No.1 dated July 3, 2014, any ODI exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the RBI even when the total ODI of the Indian party is within the aforesaid eligible net worth limit of 400% (Four Hundred percent) under the automatic route. The aforesaid prescribed limit vis-a-vis the net worth (i.e. 400%) will also not be applicable where the ODI is made out of balances held in the Exchange Earner’s Foreign Currency (“EEFC”) account of the Indian party or out of money received through American Depository Receipts (“ADRs”) / Global Depository Receipts (“GDRs”).

 

ODI under approval route

Prior approval of the RBI is required in the following cases:

          (a)  All cases not covered under automatic route;

(b) ODIs by DGFT recognized exporters that are proprietorships/unregistered partnership concerns, subject to the detailed restrictions and caps as laid down in the Direction; or

(c) ODIs by entities in the manufacturing/educational/hospital sectors that are registered trusts/societies, subject to the detailed restrictions and caps as laid down in the Direction.

The RBI, in considering these applications, shall consider the following:

              (a)       prima facie feasibility of the JV / WOS outside India;

            (b)        contribution to external trade and other benefits which will accrue to India through such ODI;

            (c)        financial status and past business track record of the Indian party and the foreign entity; and

            (d)        expertise and experience of the investing party in the same or related line of business activity as of the JV / WOS outside India.

 

ODI Transactions that require RBI Approval

  1. ODI in energy and natural resources sector exceeding the prescribed limit

  2. ODI in unincorporated entities in the oil sector

  3. ODI by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria

  4.  ODI by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing or educational or health (hospital) sector in the same sector in a JV / WOS outside India

  5. Corporate guarantee provided to Second and Subsequent level of Step Down Subsidiary (SDS) by the Indian Party;

  6. All other forms of guarantee which are provided by the Indian Party to its first and subsequent level of SDS

  7. Restructuring of the b/s of foreign entity involving write-off of capital and receivables 

  8. Capitalization of export proceeds lying unrealized beyond the prescribed limit of realization

  9. Undertaking financial commitment without equity contribution in JV / WOS

Prohibited Areas where ODI is not permitted

  1. Real estate:- Buying and selling real estate and dealing in TDR (does not include township, residential and commercial premises, roads and bridges)

  2. Banking Business and

  3. dealing in Financial products linked to INR without specific approval of RBI

Click here to know more about RBI- FLA reporting through FLAIR

Compliance requirements

At the time of Investment: File form ODI within 30 days of effecting the investment

Post Investment Compliances: The Indian Party shall:

  1. Receive share certificates/ any other documentary evidence of investment in the overseas JV / WOS and submit the same to the designated AD within 6 months

  2. Repatriate to India, all dues receivable from the overseas JV / WOS, like dividend, royalty, technical fees, etc.

  3. File APR in Part II of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party by 31 December every year

  4. Report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of SDS/change in its shareholding pattern within 30 days

  5. On disinvestment repatriate the sale proceeds immediately or not later than 90 days from the date of sale of the shares /securities

  6. File Foreign Liabilities and Assets (FLA) return every year by 15 July

 The Indian Party shall file the FLA with RBI even if APR has been filed.

 

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Author:

eStartIndia Team



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