Overseas Direct Investment (ODI) refers to investments made by Indian entities in equity shares, debt, or other capital instruments of overseas Joint Ventures (JVs) or Wholly Owned Subsidiaries (WOS). The regulatory framework for ODI is governed by the Foreign Exchange Management Act (FEMA), 1999, and guidelines issued by the Reserve Bank of India (RBI).

1. Permitted Indian Entities for ODI

The following Indian entities are allowed to make ODI:

1. Companies: Incorporated under the Companies Act, 2013.
2. Partnership Firms/LLPs: Registered under the relevant Indian laws.
3. Individuals: Under certain conditions, as per the Liberalized Remittance Scheme (LRS).
4. Trusts and Societies: Subject to RBI approval and specific conditions.

2. Modes of Investment

Indian entities can make ODI through the following instruments:

1. Equity Capital: Acquisition of shares of a foreign company.
2. Compulsorily Convertible Instruments: Such as debentures, preference shares, or other instruments that convert into equity.
3. Loans and Guarantees:
   • Loans to the foreign JV/WOS.
   • Issuance of corporate or personal guarantees for loans taken by the foreign entity.
4. Subscription to Memorandum of Association (MoA): Of a foreign company, leading to equity participation.

3. General Permission for ODI

Indian entities are allowed to make ODI under the automatic route (without prior RBI approval) if:

• The investment is within the prescribed financial commitment limit (currently 400% of the entity’s net worth as per its latest audited balance sheet).
• The investment complies with sectoral guidelines and is not in the prohibited sectors.

Prohibited Sectors

• Real estate (buying and selling of real estate, excluding development of townships, construction of residential/commercial premises).
• Gambling, lottery, and casinos.

4. Key Conditions for ODI

1. Eligibility Criteria:
   • The Indian entity must have a sound financial position, with no overdue payments to banks or regulatory authorities.
   • The foreign entity must operate in a bona fide business activity.
2. Financial Commitment Limit:
   • Aggregate financial commitment (equity, loans, guarantees) by an Indian entity in all overseas entities cannot exceed 400% of its net worth as per the last audited balance sheet.
3. Valuation:
   • ODI in unlisted companies or shares without a pre-determined price must be supported by a valuation certificate from:
     • A Category 1 Merchant Banker registered with SEBI.
     • A certified public accountant (CPA) in the foreign jurisdiction.
4. Reporting:
   • All ODI transactions must be reported to the RBI using Form ODI through an Authorized Dealer (AD) Bank.

5. Steps to Make ODI

1. Board Approval:
   • Obtain approval from the board of directors for the proposed investment.
2. Form ODI Submission:
   • File Part I of Form ODI through the AD Bank before remitting funds for investment.
3. Investment Execution:
   • Execute the investment by transferring funds or issuing guarantees.
4. Post-Investment Compliance:
   • File Part II of Form ODI and submit periodic returns (such as the Annual Performance Report) to the AD Bank.

6. Reporting Requirements

1. Form ODI:
   • Filed with the AD Bank for approval and compliance tracking.
2. Annual Performance Report (APR):
   • Submit the financial performance of the overseas entity annually to the AD Bank.
3. Disinvestment Reporting:
   • Report any sale or transfer of shares/interest in the overseas entity using Form ODI.

7. Tax Implications

1. On Dividend Income: Taxed in India as per the applicable tax rate.
2. Capital Gains: Arising from disinvestment or sale of shares in the foreign entity, taxed based on Indian capital gains tax rules.
3. Double Tax Avoidance Agreements (DTAA): Relief may be available under DTAA between India and the foreign jurisdiction.

8. Key Benefits of ODI

1. Global Market Access: Facilitates expansion into international markets.
2. Diversification: Helps in diversifying business risks geographically.
3. Enhanced Brand Value: Strengthens brand visibility on a global scale.

9. Challenges and Risks

1. Currency Risk: Exposure to foreign exchange fluctuations.
2. Regulatory Compliance: Stringent reporting and monitoring requirements.
3. Political and Economic Risks: Stability of the host country can affect the investment.

Would you like assistance with the ODI process, compliance, or specific investment-related queries?