Understanding ODI (Overseas Direct Investment) Under FEMA

Understanding ODI (Overseas Direct Investment) Under FEMA

Indian economic development has led to more Indian businesses going global. "The Foreign Exchange Management Act (FEMA) plays a key role in overseeing overseas direct investments. Under FEMA, the Overseas Direct Investment (ODI) Rules and Regulations enable Indian individuals and entities to invest in companies located outside India." In the following, let us see about the nitty-gritty of ODI rules and regulations and the impact on Indian investors.

Resident Individuals of India or entity of India or Company/firm can decide to make or form or acquire investment/shares in foreign company. Such Foreign Company is called Joint Venture – JV (in case of Partnership with Foreigner) OR Wholly Owned Subsidiary – WOS in the case where all Indian shareholders possess 100% of the Equity. Such investment by JV or WOS needs to be notified to RBI through AD Banker (Authorized Dealer Bank).

Foreign Exchange Management Act (FEMA), 1999

Capital Account Transaction involves any financial activity that changes the assets or liabilities held outside India by Indian residents, or the assets or liabilities within India belonging to non-residents. This also includes potential or contingent liabilities."

Current account transactions are the transactions which are other than Capital account transactions are concerned with the day-to-day movement of goods, services, and income across nations. These flows are an important measurement of a nation's general economic situation, an expression of its net expenditure and income at a worldwide scale.

One of the most basic tenets of FEMA that must be kept in mind while entering into any transaction, what cannot be done directly should not be attempted to be done indirectly as well. Attempting to seek for indirect modes of doing the same would be a case of default against FEMA regulations and attract penal provisions.

1. For Resident Individual: Liberalized Remittance Scheme (LRS) is a facility offered by RBI that controls the remittances by resident individuals for foreign purposes and ODI is also covered under this.
2. For Indian Entity: The rules relating to Overseas Investment (OI) in India were amended in 2022 which aims to improve the framework of Overseas Investment in India. Therefore, relevant subject rules and regulations are to be complied with in making remittance by Individuals/ Company/ Firm/ LLP.
3. Under LRS scheme issued by RBI all resident individuals including minor are allowed to freely remit up to a maximum amount of USD 2,50,000 in a financial year (April-March) whether it is a current account transaction/capital account transaction or a combination of both.
4. Indian companies, firms, or LLPs are allowed to invest in overseas entities, but the total investment must not exceed 400% of their net worth, as per their latest audited financial statement.
5. Channels of Investment: There are 2 channels of investment which can be used by Indians for ODI.
• Approval route
• Automatic Route.
6. Off-limits sectors for ODI: ODI in a foreign entity dealing in below activities is off-limits–

Investments in real estate businesses, gambling activities, or trading in financial instruments linked to the Indian rupee are restricted unless specifically approved by the Reserve Bank of India.

“Real estate Activity” includes purchase and sale of real estate or dealing in TDR (Transferable Development Rights) but excludes construction of road, bridges, commercial buildings or residential or acquisition of townships.

Types of Overseas Investment:

• Acquisition of unlisted foreign equity;
• Investment in foreign Memorandum of Association;
• Acquisition of equity shares in excess of 10% in listed foreign entity;
• Issue of Bonus shares/Right issue, tender/bidding;
• Capitalisation of dues;
• Exchange of securities and Gift/inheritance;
• Acquisition through Sweat equity/ESOP/employee benefits;
• Merger, demerger, amalgamation or arrangement scheme.

Reporting and documentation by remitter from India:

The Form FC (Section A to Section E) is to be submitted to the concerned AD bank by Individual investor desirous of making an investment in overseas entity either under Approval Route or Automatic Route.

Due date: The Form FC should be filed on outward remittance despatch date or financial commitment whichever is earlier at the time of making financial commitment in the overseas entity. That is, subscription to Memorandum of Foreign Company will be called making a Financial Commitment. Consequently, therefore, for avoiding Late Submission Fees (LSF), all the details and Form FC are to be submitted to AD Bank before the incorporation of the Foreign Entity. There are other relevant forms like Clean outward remittance, A2 which are filed along with Form FC for processing of remittance. Documents required vary from bank to bank and the investor is thus obliged to go to the Bank first in respect of documentation.

Valuation report: On subsequent investment in share capital of foreign company, valuation report must be procured from Chartered Accountant or Merchant Banker instead of investment. But no such requirement of Valuation Report is demanded for subscription to MOA of Foreign Company at initial stage.

After completion of ODI process

• Submit Share Certificates or any other document as a proof of investment in the foreign entity to the Reserve Bank's satisfaction within six months (180 days) from the remittance effecting date with the AD Bank.
• File on or before December 31 of every year, an Annual Performance Report (APR) in format pertaining to each JV or WOS overseas. According to experience, APR must be filed before November 30 to avoid last minute delay due to Banks.
• Audit of Foreign Entity's Books: While filing APR, it is mandatorily required that the Foreign Entity's books of accounts are audited by Foreign CPA/ Indian CA as per RBI directions. Some banks allow Indian CA audit while some banks mandatorily insist on foreign CPA for book auditing.
• Foreign Liabilities and Assets return (FLA): To be submitted by all the Indian Entities (except RI) who have been received FDI and/or made ODI abroad during the previous financial year by 15th of July of every year on RBI FLAIR website.

Repatriation:

Indian Investor holding ODI in a foreign company shall realize and repatriate to India:

• Any amount due from the foreign company.
• Consideration to be received on transfer of shares or disinvestment of ODI.
• Consideration to be received on liquidation of foreign company

Time limit: Within 90 days from the date on which such receivables will fall due or the date of such transfer or disinvestment or the date of actual distribution of assets made by official liquidator.

Other points:

• For certain transactions such as change in shareholding pattern, disinvestment in ODI, Foreign company shares transfer, etc., due reporting has to be filed with AD bank within due date.
• Form APR need not be filed in some cases.
• If SDS is bought, proper FEMA rules and reporting have to be adhered to.

At SKMC Global, we are a professional team of qualified specialists with seasoned FEMA consultants, dedicated to offering end-to-end advice and assistance for the entire range of Overseas Direct Investment (ODI). With our technical expertise, our clients enjoy end-to-end service specially designed for the individual regulatory, financial, and strategic needs of their cross-border investment ventures.