Overseas Direct Investment

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So many people and companies are now are looking at expanding overseas. Many are inclined to do it and many have already done it.

Here's the thing - you need to ensure you follow Overseas Direct Investment (ODI) guidelines issues by the RBI. We've had a ton of clients come to us after they have already made the investment. This is an issue. RBI has now started issuing notices for non-compliance with ODI rules.

We've heard a ton of excuses from "the Indian bank let me wire funds (without any issue)" to "we used our funds overseas to fund the new company". We've even heard some people say "I set up the company while I was travelling to XYZ country (Singapore/ Dubai/ USA more often than not) - I used my cash to set up the company."

What's common to all of these? We didn't know about any such reporting requirements. Obviously, ignorance of the law doesn't mean you get away scot-free. Skipping ODI compliance might have severe implications.

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A. What is overseas direct investment (ODI)?

Investments made by Indian Entities (Companies or LLPs) or Resident Indian Individuals by way of:

Contribution to the capital of a newly formed foreign entity
Subscription to the Memorandum of Association of a foreign entity
By way of investment in the existing shares of a foreign entity either by market purchase or private placement or through stock exchange

This however, excludes include portfolio investments*

(*portfolio investment refers to passive investment in overseas securities made with the expectation of earning a return where the investor is not interested or a participant in the management and functions of the business of the overseas entity).

Few important definitions to understand:

Joint Venture
Investment in an overseas entity is made jointly by one or more individuals or one or more entities or any combination of individuals and entities where at least one of the investor is resident in India

Wholly Owned Subsidiary (WOS)

When investment made by a single entity or individual is an entity overseas is referred to as the overseas Wholly owned subsidiary (WOS).

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B. Are there any restrictions on making investments outside India?

The restrictions are placed differently on the two categories of investors:

Individuals
Entities

Individuals:

Can invest up to the limit of 250,000 USD or equivalent in one financial year in the equity shares of an overseas entity.
This limit of 250,000 USD covers both overseas direct investments and portfolio investments. Any investment above the said limit will require prior approval of the RBI.
Individuals cannot make strategic investments covered under the ODI regulations in the following sectors:
- Real estate
- Banking
- Financial services
  (portfolio investments in the above sectors are not restricted)

Indian Entities:

Can make strategic investments (also known as financial commitment) in an overseas entity in eligible sectors upto 400% of their existing net worth (as on the date of last audited balance sheet).
The investments/ financial commitments (FC) by the Indian Entities in the JV or WOS outside India would cover:
- 100% of the equity infusion
- 100% of the loan granted
- 100% of the Corporte/ Bank Guarantees issued
- 50% of the amount of the performance guarantee issued
Prior RBI approval required if Financial commitments (FC):
- is greater than USD 1 billion in a Financial Year OR
- is greater than 400% of net worth

However, the said restriction of 400% of the net worth would not apply to the investments/ foreign commitments made out of the balances lying in the EEFC account or made out of the proceeds from issuance of American Depository Receipts (ADR) and Global Depository Receipts (GDR)

With the liberalized economy all sectors are considered eligible except real estate, banking and financial services.

Thus, Investment cannot be in a foreign entity engaged in real estate business or banking business without prior approval of RBI.

Illustration: ODI made by an Indian Entity

An Indian Company “India Ltd” having net worth of INR 5 lakhs formed a WOS Company in Singapore “Singapore PTE Ltd” by subscribing to the 100% equity shares of value of SGD 10,000. (consider 1 SGD=55 INR)

Foreign commitment = INR 5.5 lakh

% of Foreign Commitment = Foreign Commitment / Net worth = 110%

In the current case, Foreign Commitment is less than 400% of net worth. Accordingly, no RBI approval is necessary.

Continuing with the same illustration,

India Ltd intends to make overseas remittance of the following sums in Singapore Pte Ltd

1. Subscription of Preference Shares: SGD 15,000

2. Extend Loan: SGD 10,000

3. Extend Corporate Guarantee: SGD 2,000

4. Extend Performance Guarantee: SGD 2,000

Now, the Financial Commitment would be as under

Thus, since the FC> 400% of the net worth of India LTD, prior approval from the Reserve Bank of India is mandatory.

Note:

In the above example, if India LTD has balance available either in EEFC or through proceeds of ADR/ GDR and it utilizes the same to the extent of remittance of 90,000 INR or more then the requirement of prior approval of the RBI can be done away as the amount of FC will then be below INR 20,00,000 which will be equal to less than the 400% of the net worth.

C. What are the sources of funding available to individuals as well as entities for ODI?

For a Indian Resident Individual:

Out of funds held in the RFC account
As bonus shares on existing holding of foreign currency shares
When not permanently resident in India, from the foreign currency resources outside India.

There are other ways in which individual can acquire foreign securities without remitting funds from India:

as a gift from any person resident outside India
to acquire shares under the ESOP scheme issued by a company outside India
as inheritance from a person whether resident in or outside India

For Indian Entities:

Drawal of foreign exchange from an AD bank in India
Acquisition of the shares of foreign entity by way of exchange of the shares of the Indian Entity.
Capitalization of exports and other dues and entitlements (subject to conditions).
Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
In exchange of ADRs / GDRs issued in accordance with the Scheme or Proceeds of foreign currency funds raised through ADR / GDR issues.
Balances held in EEFC Account

What are the compliances required for Overseas Direct Investment (ODI)?

Click here to see the compliance requirements.

Need our assistance? Feel free to contact us!

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