Directly Investing Abroad: Understanding India's Foreign Investment Laws

Direct investment outside India refers to investments made by Indian individuals or companies in foreign entities, typically through two routes: the Automatic Route and the Approval Route. This type of investment involves contributing to the capital or subscribing to the Memorandum of Association of a foreign entity, as well as purchasing existing shares in a foreign company through market purchases, private placements, or stock exchanges. These investments can be made by setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS). There are specific eligibility criteria and regulatory requirements that must be met for such overseas direct investments, and they play a significant role in the globalized business landscape.

Direct investment outside India can be made under the Automatic Route or the Approval Route

Automatic Route

Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad. Indian Parties/ Resident Individuals are required to follow the below-mentioned procedure for ODI in WOS/JV:

• Filling form ODI Part I and getting it certified from a Statutory Auditor. It is important to note that certification from a Statutory Auditor is not required in the case of RIs.
• Submission of Form A2 of the respective AD Bank along with the above-mentioned form ODI Part I.
• Part I contains details of the JV/WOS, Indian Parties/ Resident Individuals and the remittance/ other financial commitment of the overseas entity and shall be submitted at the time of initial remittance.
• Subsequent remittances (or financial commitments) under the Automatic route and remittances (or financial commitments) under the approval route should be made only after receiving an auto-generated email from RBI confirming the UIN.

Approval Route

The applicant should approach their designated Authorized Dealer (AD) with the proposal, which shall be submitted to the Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents to the following address:

> The Chief General Manager,

Reserve Bank of India,

Foreign Exchange Department,

Overseas Investment Division,

Amar Building, 5th Floor,

Sir P. M. Road, Fort,

For approval by the Reserve Bank, the following documents need to be submitted along with Section D and Section E of Form ODI – Part I by the designated Authorized Dealer:

A letter from the designated AD of the IP in a sealed cover mentioning the following details:

• Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal, if any.
• Brief details of the transaction.
• Reason/s for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the following:
• Prima facie viability of the JV/ WOS outside India.
• Contribution to external trade and other benefits that will accrue to India through such investment.
• Financial position and business track record of the IP and the foreign entity.
• Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside India.
• Recommendations of the designated AD bank.

• A letter from the IP addressed to the designated AD bank.
• Board resolution for the proposed transaction/s.
• Diagrammatic representation of the organisational structure indicating all the subsidiaries of the IP horizontally and vertically with their stake (direct & indirect) and status (whether operating company or SPV).
• Incorporation certificate and the valuation certificate for the overseas entity (if applicable).
• Other relevant documents properly numbered, indexed and flagged.

Real estate and banking businesses are prohibited sectors for overseas direct investment

Overseas Direct Investment (ODI) is a growing trend in India, with Indian companies and resident individuals increasingly investing in and acquiring stakes in foreign entities. This has been facilitated by the Reserve Bank of India's (RBI) Liberalised Remittance Scheme (LRS), which allows free remittance of up to $250,000 per individual per financial year.

However, there are certain sectors that are prohibited for overseas direct investment, including real estate and banking businesses. This means that Indian companies cannot invest in foreign entities that primarily engage in these sectors.

Real estate business, as defined in Notification No. FEMA 120/RB-2004 dated July 7, 2004, includes buying and selling real estate or trading in Transferable Development Rights (TDRs). It is important to note that this does not include the development of townships, construction of residential or commercial premises, roads, bridges, or certain other infrastructure projects.

While real estate activities are prohibited for ODI, there are still some business activities that are permitted to accept External Commercial Borrowings (ECBs). These include:

• Construction or development of industrial parks, integrated townships, or Special Economic Zones (SEZs)
• Purchase or long-term leasing of industrial land as part of a new project or modernisation of existing units
• Any activity that falls under the 'infrastructure sector' definition

In the case of banking businesses, Indian banks operating in India are prohibited from investing in foreign entities in the banking sector. However, they can set up joint ventures or wholly-owned subsidiaries (WOS) abroad with approval from the Department of Banking Regulation (DBR) of the RBI and under the Banking Regulation Act, 1949.

It is worth noting that while these sectors are prohibited for ODI, there may be certain exceptions or specific circumstances under which investment is allowed with prior approval from the RBI or other relevant authorities.

Indian parties can make overseas direct investments in any bonafide activity

Overseas Direct Investment (ODI) has become a popular strategy for Indian businesses in the era of globalisation. ODI is an investment made by an Indian party in a foreign entity, either under the Automatic Route or the Approval Route. An Indian party can be an individual, a company incorporated in India, a body created under an Act of Parliament, or a partnership firm registered under the Indian Partnership Act, 1932.

There are several conditions that must be met for an Indian party to make a direct investment in a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) outside India. Firstly, the total financial commitment should not exceed 100% of the net worth of the Indian party as per the last audited balance sheet. Secondly, the Indian party must not be on the Reserve Bank's Exporters caution list, list of defaulters, or under investigation by any regulatory body. Thirdly, the investment should be made through an Authorised Dealer registered with the Reserve Bank of India (RBI), with all transactions routed through only one designated branch of the authorised dealer. Additionally, the Indian party must submit the required forms, including Form ODI Part I, and comply with reporting and compliance requirements, such as submitting an Annual Performance Report and an Annual Return on Foreign Assets and Liabilities.

The process for ODI can be through the Automatic Route or the Approval Route. Under the Automatic Route, an Indian party does not require prior approval from the RBI for making overseas direct investments, provided certain conditions are met. On the other hand, the Approval Route requires the Indian party to seek approval from the RBI by submitting a proposal through their designated Authorised Dealer, along with supporting documents.

Overall, ODI offers Indian businesses an opportunity to expand globally, access new markets, and improve their performance in the service and manufacturing sectors, ultimately contributing to the growth of the Indian economy and creating a mutual benefit for both India and the host country.

Individuals residing in India for more than 182 days during the preceding financial year are eligible to make overseas investments

Individuals who have resided in India for more than 182 days during the preceding financial year are eligible to make overseas investments. This eligibility criterion is outlined in the Foreign Exchange Management Act (FEMA) and is used to determine an individual's residential status for tax purposes.

According to FEMA, a "person resident in India" includes:

• Individuals residing in India for more than 182 days during the preceding financial year. This criterion does not include those who have gone out of India or stayed outside India for specific purposes, such as employment, business, or any other purpose indicating an intention to stay outside India for an uncertain period.
• Individuals who have been in India for more than 60 days in the relevant financial year and more than 365 days in the preceding four financial years.

It's important to note that meeting either of these conditions is sufficient to determine an individual as a resident of India. However, there are exemptions for certain categories of individuals, such as those leaving India for employment or those with an Overseas Citizen of India (OCI) status.

Once the residential status is determined, individuals can make overseas investments under the Liberalized Remittance Scheme (LRS). The current limit set by the Reserve Bank of India (RBI) is USD 250,000 per financial year per individual. This scheme allows residents to purchase foreign currency, acquire shares of foreign companies, invest in overseas mutual funds and venture capital funds, and more. However, it's important to note that there are certain non-permissible transactions under LRS, such as purchasing lottery tickets, remitting funds for margin trading, and investing in countries identified as "non-cooperative" by the Financial Action Task Force (FATF).

Before making any overseas investments, it's crucial to understand the tax implications. While income earned outside India is generally not taxable for NRIs, the tax liability depends on the residential status and the nature of income. Consulting a tax advisor or financial planner can help individuals navigate the tax regulations and make informed decisions about their investments.

Indian parties must report changes regarding their JV/WOS, such as diversification of activities, within 30 days of approval

Direct investment outside India refers to investments made by Indian entities in overseas joint ventures (JV) or wholly owned subsidiaries (WOS). This can be done through two routes: the Automatic Route and the Approval Route. Under the Automatic Route, Indian parties do not require prior approval from the Reserve Bank of India (RBI) for making overseas direct investments in a JV/WOS. On the other hand, the Approval Route requires prior approval from the RBI.

Indian parties are required to report changes regarding their JV/WOS, such as diversification of activities, within 30 days of approval. This is part of the post-investment compliances that Indian parties must adhere to. Other obligations include submitting share certificates or any other documentary evidence of investment to the designated Authorised Dealer (AD) Bank within six months of the remittance/investment. They must also repatriate all dues receivable from the foreign entity, such as dividends, technical fees, and royalties, within 60 days.

The process of investing in an ODI typically involves approaching a designated AD for making the remittance/investment, along with submitting a duly filled Form ODI Part I and supporting documents like a board resolution and statutory auditor certificate. Once the AD Bank scrutinises and approves the documents per regulatory guidelines, the remittance/investment will be processed. A Unique Identification Number (UIN) will be generated for the particular JV/WOS before the first remittance and will be used for future investments/remittances.

It is important to note that Indian parties are prohibited from investing in foreign entities engaged in certain sectors, such as real estate and banking, without prior approval from the RBI. Additionally, overseas entities with direct or indirect equity participation by an Indian party cannot offer financial products linked to the Indian Rupee without specific approval.

Frequently asked questions