Overseas Direct Investment (ODI) refers to investments made by Indian entities in foreign companies or ventures. It allows Indian businesses to expand internationally by acquiring stakes in foreign companies, establishing joint ventures, or setting up wholly-owned subsidiaries. ODI is governed by the Foreign Exchange Management Act (FEMA) and regulated by the Reserve Bank of India (RBI).

Key Features of ODI

Nature of Investment:

Equity shares, convertible preference shares, or debt instruments in foreign entities.

Loan or guarantee to a foreign entity.

Permissible Investments:

Setting up joint ventures (JVs) or wholly-owned subsidiaries (WOS).

Acquiring foreign business or stake in existing entities.

Eligibility Criteria for ODI

1. Entities Eligible for ODI:

Indian companies registered under the Companies Act.

LLPs: Permitted to make ODI in equity capital of foreign entities.

Partnership firms or Proprietorships: Subject to RBI approval.

Resident Individuals: Permitted under the Liberalized Remittance Scheme (LRS) up to USD 250,000 per financial year.

2. Eligible Foreign Entities:

Must engage in a bona fide business activity.

Investments in real estate, banking, or financial services are subject to specific conditions.

Limits for ODI

Automatic Route:

Up to 400% of the net worth of the Indian entity as per the last audited balance sheet.

No prior RBI approval required if within this limit.

Approval Route:

Investments exceeding the 400% limit require prior RBI approval.

Investments in prohibited sectors or by restricted entities also require RBI approval.

Modes of Funding ODI

Drawal of Foreign Exchange: From an Authorized Dealer Bank.

Capitalization of Exports: Goods or services exported to the foreign entity.

Swap of Shares: In exchange for shares of the foreign company.

Use of ECB Proceeds: External Commercial Borrowings can fund ODI in certain cases.

Reporting Requirements for ODI

Timely reporting to the RBI through the Authorized Dealer (AD) Bank is mandatory. Key forms include:

Form ODI – Part I: For initial remittance or investment declaration.

Form ODI – Part II: Annual Performance Report (APR) to track the performance of the foreign entity.

Form ODI – Part III: For disinvestment or liquidation of the foreign entity.

Compliance under FEMA

Adherence to Timeframes: File forms and reports within stipulated deadlines.

Permissible Activities: Foreign entities must engage in lawful and permitted activities.

Utilization of Funds: ODI proceeds must be used only for stated purposes.

Advantages of ODI

Global Expansion: Enables Indian businesses to access international markets.

Diversification: Reduces dependency on domestic markets.

Technology Transfer: Access to advanced technologies and expertise.

Revenue Growth: Generates income from foreign operations.

Recent Amendments in ODI Policy

Resident Individuals: Expanded scope for individuals under LRS to invest directly in foreign startups or entities.

ODI Limits: Liberalization of funding options for cross-border investments.

Ease of Reporting: Online reporting via RBI’s Overseas Investment portal.

Prohibited and Restricted Sectors

Investments in certain sectors are prohibited:

Real Estate: Purchase of land purely for speculation.

Banking Business: Unless specifically permitted.

Challenges in ODI

Regulatory Compliance: Strict adherence to FEMA and RBI norms.

Geopolitical Risks: Changes in foreign policies or regulations.

Currency Risk: Fluctuations in exchange rates can impact profitability.

Steps to Make an ODI

Identify the Target Entity: Assess the financial viability and compliance of the foreign company.

Choose Mode of Investment: Decide between equity, loans, or guarantees.

Seek Approvals (if required): Obtain RBI or government approval for restricted investments.

File Necessary Forms: Submit Form ODI through the AD Bank.

Monitor and Report: Track the performance of foreign entities and file annual reports.

Conclusion

Overseas Direct Investment is a powerful tool for Indian entities to establish a global presence. By adhering to FEMA guidelines and leveraging opportunities under ODI, businesses and individuals can achieve international growth while ensuring compliance with regulatory frameworks.