Overseas Direct Investments aka ODI which refers to the investments made in the overseas entities by way of contribution to their capital or subscription to the MoA (Memorandum of Association) of a foreign entity or by purchasing existing shares of a foreign entity by two way which are market purchase or private placement or through stock exchange, but excluding portfolio investment.
In simple term, Overseas Direct Investments (ODI) means an investment made in overseas JV/WOS by way of capital contribution or by purchasing existing shares either by market or private placement but it does not include portfolio investment.
The Term joint venture (JV) abroad means a foreign concern formed incorporated in a foreign country as per the laws & regulations of that country and in which investment has been made by an Indian entity.
The Term wholly owned subsidiary (WOS) abroad means a foreign concern formed incorporated in a foreign country as per the laws and regulations of that country and whose entire capital is owned by an Indian entity.
FEMA (Transfer or Issue of any Foreign Security) Regulations, 2004 regulate acquisition & transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas JV and wholly owned subsidiaries as also investment by a person resident in India in shares & securities issued outside India. Overseas Investment can be made via two routes which are (i) Automatic Route and (ii) Approval Route.
An Indian Party has eligibility to make Overseas Direct Investment (ODI) into a Joint Venture or Wholly Owned Subsidiary. Now let’s discuss who is Indian Party?
An Indian Party is:-
- A Company
- A body made under an Act of Parliament
- Limited Liability Partnership (LLP)
- Registered Partnership Firm*
- Any other entity in India as notified by RBI
- A combination of the above entities can also form an “Indian Party”.
Apart from Indian party as mentioned above many other Persons can be eligible to Make Investments outside India which includes
- Resident Individuals
- Proprietorship concern and unregistered partnership firm
- Trust registered under the Indian Trust Act, 1882
- Society registered under the Societies Registration Act, 1860
Disinvestment by the Indian party from its Joint Venture / Wholly Owned Subsidiary abroad may be by way of transfer / sale of equity shares to a non-resident / resident or by way of liquidation / merger / amalgamation of the Joint Venture / Wholly Owned Subsidiary abroad.
Typically Indian Party opts for sale of shares which can be done these manners:-
1. Disinvestment by Indian Party without write off:
Under the automatic route Indian Party may disinvest without write off is subject to the following:
(i) The sale is affected via stock exchange where the shares of the overseas Joint Venture/ WOS are listed.
(ii) If the shares are not listed on the stock exchange and through private arrangement the shares are disinvested, the share price is not less than the value certified by a CA or Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the Joint Venture/ WOS.
(iii) The Indian Party does not bearing any outstanding dues in the form of royalty, consultancy, dividend, technical know-how fees, commission or other entitlements and export proceeds from the JV or WOS;
(iv) The overseas concern has been in operation for at least 1 full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
(v) The Indian party is not under investigation by any of these like SEBI or IRDA or CBI or DoE or any other regulatory authority in India
(vi)Other terms & conditions prescribed under ODI Regulations
2. Disinvestment by Indian Party with Writes Off:
Under the automatic route Indian Party may disinvest with write off, subject to the following:
- Where the Joint Venture or Wholly Owned Subsidiar is listed in the overseas stock exchange;
- Where the Indian Party is listed on a stock exchange in India and having a net worth which is not less than INR 100 crore;
- Where the Indian Party is not listed company and the investment in the overseas JV / WOS does not exceed $ 10 million
- Where the Indian Party is a listed company with net worth of less than INR 100 crore but investment in an overseas JV/WOS does not exceed U$10 million.
- All other conditions as applicable in Disinvestment without write off shall mutatis mutandis apply for Disinvestment with write off.
3. Writing off: The Indian Party can write-off the following investments / dues from the foreign entity:–
- Equity share capital and Preference share capital.
- Royalty and Loans given.
- Technical knowhow and Management fees.
4. Compliances followed by the Indian Party: Reporting of Part III of Form Overseas Direct Investments to Authorised Dealer Bank within 30 days of disinvestment.
The write-off need be reported to the RBI by the designated Authorised Dealer bank within 30 days of write-off.
The write-off / restructuring is subject to the condition that the Indian Party need to submit the following documents for scrutiny along with the applications to the designated Authorised Dealer Category – I bank under the Automatic as well as the Approval Routes:-
- A certified copy of the balance sheet which will show the loss in the overseas Wholly Owned Subsidiary /Joint Venture set up by the Indian Party
- Next 5 years Projection which describe benefit accruing to the Indian company resultant to such write off.
5. Sale Proceeds
Sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares and documentary evidence to this effect will be submitted to the Regional office of the RBI by the designated authorized dealer.