FEMA Article July 2020

Overseas Direct Investment (ODI) In this Article, we will understand what is an - CA Jayashree Krishnamurthy Overseas Direct Investment and the regulations pertaining to the same under entity by way of capital contribution or Foreign Exchange Management Act 1999. subscription to Memorandum or by share purchase in the form of private placement or What is an ODI? through stock exchange, signifying a long- term interest in the foreign entity (Joint ODI refers to those Investments made under Venture (JV) or Wholly Owned Subsidiary the automatic or approval route in a foreign (WOS)) by an Indian Party. Indian Party refers to: A Company incorporated in India Body created under an Act of Parliament Partnership Firm registered under Indian Partnership Act 1932

Limited Liability Partnership Any other entity as may be notified by RBI Permitted/Prohibited Activities under ODI: An Indian Party can make ODI in any bonafide activity. The following are prohibited activities under ODI:

Automatic Vs Approval Route: Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host country. Automatic Route investments are those The prescribed limit vis-a-vis the net worth wherein the Indian Party doesn’t need RBI will not be applicable where the investment is approval for making ODI. The Indian party made out of balances held in the EEFC can approach the Authorised Dealer Category- account of the Indian party or out of funds I Bank and obtain the necessary approval. raised through ADRs/GDRs; In case of approval route, RBI approval for ii. The Indian Party is not on the Reserve making such ODI is mandatory. List of cases Bank’s exporters' caution list / list of where RBI approval is mandatory has been defaulters to the banking system published/ specified by the RBI. circulated by the Credit Information Bureau of India Ltd. (CIBIL) /RBI or any other credit Extent and Criteria of ODI Investment information company as approved by the allowed: Reserve Bank or under investigation by the Directorate of Enforcement or any i. The Indian Party can invest up to the investigative agency or regulatory authority; prescribed limitof its net worth (currently and 400% of networth, with the condition that anything exceeding USD I billion needs RBI iii. The Indian Party routes all the transactions approval) (as per the last audited Balance relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party. Obligations of the Indian Party which has made ODI abroad: Proof of Investment To receive share certificates or any other Income from Investment document as an evidence for investment in the JV/WOS, and submit the same to the AD within 6 months Repatriate to India all dues receivable from JV/WOS like dividend, royalty, technical fees etc., Reporting Annual Performance Report to be filed with RBI Reporting on Changes every year through AD Reporting details of decisions taken by JV/WOS Repatriation on disinvestment regarding diversification of activities, setting up of Step-Down Subsidiaries or alteration in shareholding pattern within 30 days of approval of those decisions. Sale proceeds of shares/ securities to be repatriated to India immediately on receipt and not later than 90 days from the date of sale.

Permitted Method of Funding for ODI: The following sources can be used for making ODI by an Indian Party: i. Foreign exchange purchased from an AD bank in India ii. Capitalisation proceeds of export receivables iii. Share swaps iv. Proceeds of ECBs (External Commercial Borrowings)/ FCCBs (Foreign Currency Convertible Bonds) v. In exchange of ADRs/GDRs vi. Balances held in EEFC account vii. Proceeds of foreign currency raised through issue of ADRs/GDRs ODI by Resident Individuals from India: A resident Individual can remit under Liberalised Remittance Scheme such permissible amount prescribed by RBI from time to time per financial year for purchase of securities and also setting up of JV/WOS overseas.Such purchase can be in the following modes:  Out of funds held in RFC account  As bonus shares on existing foreign currency shares held  When not permanently resident in India, from the foreign currency resources outside India.

It is important to note that 400% of Networth mentioned as the eligible limit if for the total financial commitment of the Indian Party with respect to ODI. Let us understand what the term financial commitment means: It shall comprise of: TYPE QUANTUM Investment in equity, Compulsorily convertible Preference Shares 100% and Other Preference shares of JV/WOS 100% Loans to Overseas JV/WOS 100% Guarantee issued to Overseas JV/WOS other than performance guarantee 100% Bank guarantee issued to JV/WOS that is counter guaranteed by the Indian party 50% (in case if such 50% Performance Guarantee leads to increase in financial commitment beyond the limits, RBI approval is needed) CONCLUSION: This Article just gives an overview of some of the important aspects of an ODI Investment. The Master Direction on Direct Investment by Residents in Joint Venture/ Wholly Owned Subsidiary Abroad dated Jan 1 2016, updated as on September 18,2019 explains in detail the instructions issued on Direct Investments in JV/WOS.