Direct Investment outside India means investment through contribution to the capital or subscription to the MoA (Memorandum of Association) of a foreign entity or through purchase of existing shares of a foreign entity either by market purchase or private placement or by stock exchange, by setting up a JV (Joint Venture) or a WOS (Wholly Owned Subsidiary).
Foreign Exchange Management Regulations, 2004 regulate acquisition & transfer of a foreign security by a person resident in India. Overseas Direct Investment can be made by 2 routes such as (i) Automatic Route ii) Approval Route.
The transactions on account of ODI are governed by FEMA, 1999 (42 of 1999)- section 6 (3)-clause (a) read with Foreign Exchange Management, Regulations notified vide Notification No. dated July 7, 2004, FEMA.120/RB-2004.
The above mentioned provisions provides for the direct investment made by residents in JV (joint ventures) and the WOS (wholly owned subsidiaries) who located abroad.
Any Investment in the JV and in the WOS may be made either through
- Automatic Route (No need to obtaining any approval of the Government of India)
- Approval Route (Need the approval of the Government of India)
Foreign Exchange Management Act, 1999- section 6(3) confers to the Reserve Bank of India (RBI) powers to prohibit, restrict or regulate the transactions by imposing necessary restrictions.
An investment outside India can be made through an Indian party or an individual or (single or in association with ‘Indian Party’ or another individual resident). All resident individuals, including minors, are permitted to freely remit up to $ 250,000 per FY (financial year).
What are the Forms of Entity that an Indian party can form for Overseas Direct Investment:-
- Joint Venture – A foreign entity formed registered as per the law and regulations of the host country in which the Indian party makes a direct investment by contributing in the finance or providing technical know, or by any other means as they both have agreed mutually.
- Wholly Owned Subsidiary – A foreign entity formed registered as per the law and regulations of the host country, whose entire capital is laid by the Indian party.
What are the Modes of Direct Investment:-
- In both the cases, an Indian Party should approach an Authorized Dealer Category – I Bank (hereafter, referred as “AD bank”) with an application in Form ODI Part-I along with the prescribed enclosures / documents.
- The AD (Authorized Dealer) Bank needs to report the relevant Form ODI in the online OID application and obtain UIN while executing the remittance and intimate to the Remitter which shall be used by him/her in all the future communication made with RBI.
Who are eligible to make an ODI under the Automatic Route?
An Indian Party is eligible to make an ODI (overseas direct investment) under the Automatic Route.
Who is an “Indian Party”?
An Indian Party is a
- Company incorporated in India under an Act of Parliament
- A partnership firm incorporate under the Indian Partnership Act, 1932
- A Limited Liability Partnership (LLP) registered under the LLP Act, 2008
- Any other entity in India as may be notified by the Reserve Bank of India.
- When more than one such company makes an investment in the foreign Joint Venture / Wholly Owned Subsidiary, such combination will also termed as Indian Party.
What are the Sectors in which ODI is Restricted?
- Real Estate
- Banking Businesses.
What are the Different Kinds of Routes for Making Investment Outside India?
- Automatic Route
- Approval Route
What is the Process to Make an ODI (overseas direct investment) in a JV/WOS Under the Automatic Route by an Indian party?
In Automatic Route, an Indian Party does not need any prior approval from RBI for making overseas direct investments in a JV/WOS abroad.
The Indian Party who wants to make overseas direct investment under the automatic route is needed to fill up Overseas Direct Investment (ODI) form duly supported by the documents listed therein like
- Certified copy of the Board Resolution
- Statutory Auditors certificate a
- Valuation report (in case of acquisition of an existing company)
According to the valuation norms & approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.
Once the report of remittance inform ODR is received by the Reserve Bank through the designated Authorized Dealer, a Unique Identification Number (UIN) for that particular investment is issued for the purpose of future reference. After allotment of the identification number, Subsequent investment in the same project will be permitted to be made.
The one and only need is that regardless of the no. of promoters, one JV/WOS have permission to have only one ‘designated Authorized Dealer’ to make all its transactions
How to Make Investment?
1. Indian Party to approach (Authorized Dealer) Bank with FORM ODI. All transactions relating to a JV / WOS need to be routed by 1 branch of an AD (Authorized Dealer) Bank
2. To check, for Indian Party whether all prior FEMA compliance needs to be completed (filing of APR forms for other JV/WOS needed too).
3. AD may ask for details of investment abroad like:
If not through Special Purpose Vehicle (SPV)
- Project Report / Feasibility Study
If through SPV
- Project Report / Feasibility Study
- Details of underlying investment
4. Investments through Special Purpose Vehicle will allow under Automatic Route:
- All conditions applicable for direct investment apply also to investments through Special Purpose Vehicle
- Underlying investments t by SPV to be reported to RBI through (Authorized Dealer) Bank