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Published on 11 April 2025

Understanding Overseas Direct Investments: Benefits, Guidelines, and Procedures

Advantages of Overseas Direct Investments (ODIs)

  1. Growth in Exports

    • Enhances exports of machinery, goods, and services from India.

  2. Foreign Exchange Benefits

    • Increases foreign exchange earnings through dividends, royalties, and technical know-how fees.

Guidelines for Overseas Direct Investments (ODIs)

ODIs are governed by various regulations and notifications, including:

  1. Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

    • Issued by the RBI via Notification No. FEMA 120/RB-2004, dated July 7, 2004.

  2. Notification FEMA No. 19

    • Dated May 3, 2000, regulates the acquisition and transfer of foreign securities by residents in India.

    • This includes investments by Indian corporate entities in Joint Ventures (JVs) and Wholly Owned Subsidiaries (WOS) abroad, and also allows resident individuals to invest in shares and securities through the Liberalized Remittance Scheme (LRS).

  3. Master Directions

    • Circulars on ODIs by resident individuals in JVs or WOS, along with FAQs can be found at rbi.org.in.

Clarification Address for ODIs

  • Chief General Manager,
  • RBI, Foreign Exchange Department,
  • Overseas Investment Division,
  • Central Office Amar Building,
  • 5th Floor, Mumbai - 400001

Automatic Routes for Resident Individuals under the LRS

  1. ODIs are permitted up to USD 250,000 per person per financial year under LRS.
  2. Investments can utilize funds from RFC accounts without limit.
  3. Acquire bonus shares for existing foreign currency shares without restriction.
  4. Use foreign currency resources located outside India by individuals not permanently residing in India.

Inclusions and Exclusions in ODIs

  1. Inclusions

    • Investments through contributions to capital or subscription to Memorandum and Articles of Association of foreign entities are included.

  2. Exclusions

    • Portfolio investments by listed companies where up to 50% of net worth is allocated to listed shares or rated debt securities outside India are excluded.

Acquisition of Existing Companies Outside India

  1. Indian entities can acquire partial stakes through JVs or full stakes via WOS, subject to prescribed valuation norms.

Permitted Activities

  1. Indian entities may invest in bona fide activities, apart from those specifically prohibited.
  2. Additional conditions apply to the financial services sector.

Prohibited Activities

  1. Investment in real estate activities and banking businesses outside India is generally prohibited.
    • Indian banks may establish JVs or WOS abroad with RBI approval under Banking Regulation Act, 1949.

Definition of Indian Entity

  1. An entity incorporated in India.
  2. A body created under an Act of Parliament for specific purposes.
  3. A registered partnership firm.
  4. A Limited Liability Partnership (LLP).
  5. Any entity notified by the RBI.

Permissible Real Estate Activities

  1. Trading in real estate or Transferable Development Rights (TDRs) is not permitted.
  2. Development of townships or construction of residential, commercial premises, roads, and bridges outside India is allowed.

Automatic Routes for ODIs

  1. Indian entities do not require RBI approval for ODIs in JVs or WOS.
  2. Regulatory authority approval is needed for financial service sector investments.

Permitted Limits under Automatic Route

  1. ODIs are permitted up to 400% of the net worth of the eligible Indian entity in JVs or WOS.
  2. The limit does not apply if using funds from the EEFC account.
  3. Indian entities must route all transactions through a single AD-I bank branch.

Net Worth Calculation

  • Net worth = Paid-up Capital + Free Reserves.
  • Paid-up Capital = Equity Shares + Preference Shares.

Procedure for ODIs under Automatic Route

  1. Submit form ODI along with:
    • Certified copy of the Board Resolution.
    • Statutory Auditor Certificate.
    • Valuation report required for existing company acquisitions.

Submission of Form ODI

  1. Form ODI is available as an annex to the master direction on direct investment in JVs/WOS abroad.
  2. The AD-I bank must handle submissions and reporting for UIN allotment, subsequent remittances, and APR filings.

Financial Commitments for ODIs

The total financial commitments for ODIs, including loans to JVs/WOS and guarantees, must not exceed 400% of the net worth.

Valuation Norms for Acquisitions

  1. For ODIs exceeding USD 5 million, share valuation must be conducted by SEBI-registered merchant bankers or their equivalents abroad.
  2. For ODIs not exceeding USD 5 million, valuation can be done by a Chartered Accountant or Certified Public Accountant.

Charges and Pledges on Financial Assets

  1. RBI permission is required for creating charges on immovable properties or pledging shares of Indian parent companies.

Treatment of ODIs in Specific Countries

  1. Pakistan: ODIs are not permitted under the automatic route.
  2. Nepal: ODIs can be made in INR under the automatic route.
  3. Bhutan: ODIs can be in INR and freely convertible currencies under the automatic route.

Designated Authorized Dealers (AD-I Banks)

  1. All transactions must be routed through one AD-I bank branch.
  2. Changes to the designated AD-I bank require RBI approval after obtaining an NOC from the current bank.

Unique Identification Number (UIN)

  1. No prior registration with the RBI is required for ODIs under the automatic route.
  2. A UIN is allotted following the first remittance, which must be quoted in communications with the AD-I bank.

Utility of UIN

The UIN does not imply RBI approval and is solely for tracking inflows and outflows.

ODIs Requiring RBI Approval

  • Required for ODIs in energy/natural resources exceeding 400% and investments by proprietorship or unregistered partnerships.

Parameters for Approval Route Decisions

  1. The overseas investment should significantly benefit India’s trade and economic interests.
  2. The financial position of both Indian and foreign entities must be sound.

ODIs in the Financial Services Sector

Indian entities in the financial services sector must meet specific conditions, including recent profit history and obtaining necessary approvals.

Funding Sources for ODIs within 400% Limit

  1. Withdrawals from an AD-I bank in India.
  2. Swap of shares.
  3. Receivables from exports, External Commercial Borrowings (ECBs), Foreign Currency Convertible Bonds (FCCBs), and balances in EEFC accounts.

Use of Subsidiary or Holding Company Net Worth

  1. Indian entities may utilize the net worth of subsidiaries or holding companies, with appropriate disclaimers required if limits are not independently met.

Capitalization of Export Receivables for ODIs

  1. Indian entities can capitalize receivables from foreign companies against specific services up to 400%, with RBI permission needed if proceeds remain unrealized beyond six months.

Compulsory Convertible Preference Shares (CCPS)

Investments in CCPS by Indian entities are allowed up to 400%.

Share Swap Arrangements

ODIs in JVs or WOS via share swap are permitted under the automatic route, adhering to valuation norms.

Partnerships in ODI Investments

Registered partnership firms can engage in ODIs subject to the same conditions as corporate entities.

Holding Shares in the Name of a Partner

Individual partners may hold shares in the name of the partnership in JVs or WOS outside India pending host country regulations.

Setting Up Step-Down Subsidiaries

  1. Permitted up to 400% with existing JVs or WOS, subject to additional requirements in financial services.

Establishing JVs/WOS via Special Purpose Vehicles (SPVs)

JVs or WOS can be structured through SPVs under the automatic route.

Funding Step-Down Subsidiaries

  1. Funding may occur directly or through SPVs, with guarantees permissible up to established financial limits.

Pledging JV/WOS Shares

Pledging shares as loan security is allowed, given compliance with the total limit of 400%.

Legal Obligations of Indian Entities

  1. Indian entities must:
    • Secure share certificates or documentary evidence of investments.
    • Repatriate all dues from JV/WOS.
    • Submit Annual Performance Reports (APRs) and notify RBI of changes.

Penalty for Failure to Submit APRs

Penalties apply for delayed or non-submission of APRs, which must be filed after the audit completion of accounts in the host country.

Resident Individuals and Acquisition of Foreign Securities

Residential individuals may acquire foreign securities under specific conditions without RBI approval in certain scenarios.

Other ODIs Beyond JVs/WOS

Listed Indian companies can invest up to 50% of net worth in foreign companies outside India or rated debt securities exceeding certain limits.

Acquisition of Qualification Shares

Resident individuals can acquire qualification shares for director roles within set financial limits.

Acquisition of Right Shares

Resident individuals may acquire rights shares of companies outside India within stipulated financial limits.

Employees Acquiring Shares in Foreign JVs/WOS

Employees and directors in related companies can acquire shares following prescribed conditions.

ODIs by Mutual Funds and Venture Capital Funds

  1. Indian mutual funds can invest in various foreign securities.
  2. Domestic venture capital funds can invest in equity of foreign VCFs.

Agriculture Investments Abroad

Indian entities may invest in agriculture operations and acquire land up to specified limits, subject to valuation certification.

Bidding and Tendering Procedures for ODIs

ODIs through bids or tenders are permitted, with banks allowed to facilitate earnest money remittances.

Hedging for Foreign Exchange Risks

  1. Indian entities can hedge risks with AD-I banks for ODIs, including loans and equity.
  2. Market value protections and rollover options are available.

Performance Guarantees

Performance guarantees can be issued for JVs but are limited in their financial impact for net worth calculations.

Corporate Guarantees for Step-Down Subsidiaries

Corporate guarantees may be issued for subsidiaries, provided stake ownership requirements are met.

Disinvestment from JVs/WOS

  1. Disinvestments are allowed under specific terms, both with and without write-offs, requiring adherence to regulations governing such transactions.

Write-Off Provisions

Write-offs of investments are permissible under reserved conditions by both listed and unlisted Indian companies.

Conclusion

The regulatory framework governing Overseas Direct Investments is complex yet provides significant opportunities for Indian entities. It is critical for entities to comply with all norms and maintain meticulous records to ensure smooth operations while adhering to the guidelines set forth by the Reserve Bank of India.

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